Striking a balance between affordability and market stability

Writing for Utility Week Joanna Elson, chief executive of the Money Advice Trust charity, talks about how the energy retail sector needs to strike the right balance between affordability for consumers and ensuring suppliers can operate in a stable market. While she acknowledges it’s important for energy suppliers to be viable, Elson stresses this should not come at an unaffordable cost to individuals.

In response to the energy crisis, there has been a strong focus on ensuring the stability of the UK energy market and that suppliers are more resilient against financial shocks.

Ofgem’s package of reforms, launched in November last year, talked about customer protection in the same breath as market risk and stable business models. Reducing the risk of energy prices escalating in future, including as a result of supplier failure, whilst also protecting customers from the worst impacts of market shocks, is of course important.

Suppliers need to be viable, but this should not come at an unaffordable cost to individuals. The right balance needs striking. In discussions about market stability, price cap levels and bad debt allowances, we must not lose sight of the very difficult situation millions of households face.

Unaffordable bills – the individual impact

Figures recently released by Ofgem have shone a spotlight on the scale of the impact of high energy prices for struggling households.

These figures come as no surprise to organisations like ours that offer support and advice to people experiencing financial difficulty. Our advisers at National Debtline see first-hand the impact of high energy costs. In June, one in five (19%) National Debtline clients had energy arrears and energy arrears is now the second most common priority debt amongst callers to National Debtline.

Two in five (41%) callers to our service have a ‘deficit budget’ where their income isn’t enough to cover essentials. With incomes unable to keep up with rising costs, we are hearing from people cutting back on essentials, including buying less food and reducing their use of water and electricity. In many cases, this is still not enough to prevent them falling into arrears.

A high debt burden

According to Ofgem’s figures, the vast majority of customer energy debts exist without a repayment plan in place. This is not surprising, given many people are struggling to afford even their ongoing usage, let alone payments towards energy debt. The figures show average debt levels for gas and electricity amongst customers in arrears have risen sharply as energy costs have increased.

These debt levels are simply not affordable for many.

Whilst there is good practice out there, and many examples of suppliers offering support for people who have fallen behind, this is far from consistent. We estimate that 3.2 million people in the UK have been asked to repay energy arrears at a rate they could not afford.

A Help to Repay scheme

The current situation is unsustainable. Leaving vulnerable people trapped in energy debt that they cannot afford to repay is not good for the market, and it is certainly not good for individuals.

Our proposals for a Help to Repay scheme, backed by 14 organisations, would offer government funded support to eligible people struggling to repay their energy arrears.

The scheme would provide a safe route out of debt via two different forms of support:

• Debt relief in the form of writing off eligible energy arrears; and
• Repayment matching – for example, by matching each pound repaid with an equivalent amount of debt relief, or providing debt relief on remaining arrears after a certain period of ongoing payments.

This is not a completely new idea – similar supplier-led schemes have been used to good effect on a smaller scale.

We are also proposing it is delivered centrally – either by government or a commissioned, expert grant-giving organisation making decisions on eligibility.

Open for discussion

There are multiple benefits to this approach. It will bring down debt in the market more quickly, contributing to lower energy bills for customers (via a decreased bad debt allowance within the price cap) which would contribute to lower inflation and improved financial stability in the energy market as a whole.

There is also strong public backing: three quarters (73%) of UK adults said they would support a scheme that helps people in energy debt due to high costs to reduce what they owe.

This scheme can work well for government, suppliers and customers alike, but it requires cooperation to make it a reality.

For energy customers facing unaffordable repayments, support cannot come soon enough. Action is needed now to reduce the risk of financially vulnerable households being pushed into further hardship by collection activity for debts that they simply cannot afford.

We believe our Help to Repay Scheme can do just that and we are keen to hear suggestions as to how the scheme could work as effectively as possible. It could also form part of a wider package of support this winter.

And if it is a measure that improves the financial stability of the market, it also reduces the risk of future crises – something we can all get behind.