The energy debt dam will burst

With no sign yet of further government support for energy consumers through what is expected to be a difficult winter, there are fears debts are spiralling out of control. Utilita Energy estimates debts to be “well in excess of £1 billion”. Writing for Utility Week the company’s chair Derek Lickorish warns the “dam will burst” on energy debt if a solution is not found soon.

I agree with Jonathan Brearley’s recent comments that the price cap is not fit for the market that we have today and was a factor in the collapse of 30-plus suppliers.

The energy crisis and ongoing uncertainty created by Russia’s illegal invasion of Ukraine is only going to increase risk and volatility in the marketplace until the war is over.

In parallel, we have got to urgently look at how we can help customers going into this winter. There are some very worrying leading indicators.

We know from our own smart meter data – where we seek to understand self-disconnections and get customers back on supply should this occur – that we are seeing a significant increase in the number of self-disconnections following the cessation of the government’s support package in the spring.

The graph below shows a long-term trend from 1 April 2021 of self-disconnection patterns across our entire smart prepay estate (electricity meters only). The key features are:

• Significant step up in self-disconnections following large price rises in April 2022;
• Significant reduction in self-disconnections during the period 1 October 2022 to 31 March 2023, i.e. while Energy Bill Support Scheme (EBSS payments) were being credited direct to the meter, and despite a further 25% increase in underlying energy prices (capped at the £2,500 level by the Energy Price Guarantee)
• Steady increase in self-disconnections since 31 March 2023 to nearly double the pre-crisis levels despite the underlying prices still capped by the EPG. This indicates that affordability is an issue now, and consequently we would expect that it will be far bigger issue during the coming winter

Other data sets paint a similarly worrying picture with demand for Additional Support Credit showing an increase of 1,100%. And this is in addition to the financial support offered by our self-serve Power Up app feature which in July alone provided £3 million in short-term energy loans to customers.

Of course, we know that incomes for the lowest income households have not risen in line with their effective rate of inflation. This is because inflation is being driven by basic needs which form a larger proportion of the expenditure of this group; and in any event incomes are increased by historic inflation increases and consequently have not taken into account recent increases in food prices.

In our discussions with many third-party agents and debt charities, we are constantly being told that savings are depleted in this demographic, and that access to further credit is limited. This again would indicate that affordability next winter will be much more of a challenge than last year.

Our customer service agents, particularly those in our Extra Care Team, who are on the frontline of the cost-of-living crisis, are also hearing first-hand about the awful dilemmas customers face every day, such as whether to go and buy new school shoes for their kids, or put petrol in the car and food on the table – and of course energy, alongside other household bills, is there as well.

We are also seeing increased levels of debt, and bad debt, in our customer portfolio, as are other suppliers. There is a moratorium on enabling customers to clear their energy arrears via a prepayment meter in certain circumstances, that for many means there is a huge increase in debts building up where this has happened.

As the eighth-largest domestic energy supplier in the marketplace, we can see significant debt figures in the pipeline. I’d suggest a combined total across all households well in excess of £1 billion – and at some juncture that dam will burst. There is a danger we are lulling people into a false sense of security about energy arrears – and talking about the problem and not about the solution.

Various commentators have mentioned a social tariff as a way forward. However, at Utilita we think the better idea would be a Social Discount. This is much quicker to administer as tariff changes take time and will always be behind the marketplace. This ‘lag’ was one of reasons cited by Jonathan Brearley as being responsible for the collapse of 30 suppliers, who were forced to sell energy at a huge loss before the price cap was updated.

We are calling on the government to make sure that we are being clear on the assistance against a certain criteria for this winter and also to ensure there is awareness of the fact non-payment of energy bills will eventually cause a severe headache for people – unless the government is going to look at a package of debt relief.

Returning to the Social Discount, this should be available to the poorest in our society, using data from the Department for Work and Pensions which would enable something more tightly targeted – because none of us know how long the Ukraine war is going to endure.

Therefore, we need to be on a war-like footing to have a mechanism that is going to ensure people have access to the energy they need this winter to maintain their physical and mental wellbeing.

In our recent report, Countdown to Cold, we estimated that at least £600 for each of 10 million lowest income homes would be required over the coming winter. We also funded some research by Oxford University that suggests the figure might be as high as £1,000 per household.

Academic research has suggested that as much as 42% of additional income given to low-income homes will show up as savings in the NHS because people are being kept warm in their own homes. So, if ‘EBSS2’ is implemented at the level of £600 for 10 million homes, there should be a saving of more than £2.5 billion in the cost of the NHS (relative to where it would have been).

The energy industry moved very quickly last year to implement the EBSS scheme, and this functionality, or delivery mechanism, remains available. I am sure that a better targeted EBSS (similar to Warm Home Discount) remains an essential policy for the coming winter.

The sooner all stakeholders come back to the table and thrash out the solution the better!