Soaring UK Household Energy Bills and Bumper Energy Company Profits: What should the Government, Energy Companies and Consumers Do?

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By Dr Jing Du
Assistant Professor in Finance, Birmingham Business School

British households are taking a huge hit due to rising energy prices. The energy regulator Ofgem admitted that the annual bill of British households will rise faster this winter than previously forecast. According to Cornwall Insight, it is predicted that the typical domestic customer is likely to pay £3,582 a year from October 2022, with this rising further to £4,266 a year from January 2023. In contrast, the average bill was just £1,400 a year in October 2021. Meanwhile, BP has reported its biggest quarterly profit in 14 years after oil and gas prices surged dramatically. The energy giants underlying profit for the April-June period hit £6.9bn ($8.45bn), which is more than triple the amount it made in the same period last year. This follows a series of profit announcements by other companies including Shell, Equinor, TotalEnergies and British Gas owner Centrica, which have been reaping the benefits from rising gas and oil prices.

On the one hand, UK households suffer from soaring energy bills whilst energy companies benefit from the bumper profits. In order to deal with the current and future energy crisis, the government, energy companies and consumers need to work together.

The question is, what are the government doing to help?

The government may introduce comprehensive measures to help people ease the pressure on rising energy bills, for example imposing a tax on energy profits. The British government will start levying a 25% tax on the profits of oil and gas companies from May 26 to help households pay their energy bills. The Treasury said it expected the windfall tax, known as the Energy Profits Levy, to raise around £5bn in its first year in energy subsidies for UK households. British campaign groups such as Greenpeace and Friends of the Earth as well as Labour and the Liberal Democrats, have supported tougher windfall taxes on the profits of oil and gas companies.

In addition, the government has introduced a £400 energy grant for all households. Ofgem should review the energy price cap in a timely manner to ease the rise in household energy prices. The government should formulate a new energy strategy in the medium and long run. For example, developing renewable energy and nuclear energy, making better use of domestic natural resources, and improving local energy supply capacity could alleviate the energy crisis and provide a guarantee for the future energy security of the UK. In addition, the government could strengthen bilateral and multilateral economic and trade cooperation with Gulf countries and energy exporting countries, striving to import oil and natural gas from more countries at more favourable prices.

In order to deal with soaring energy costs and other living costs, most people believe wages should increase accordingly. According to data released by the Office for National Statistics (ONS), the average regular pay excluding bonuses increased by 4.2%, while the UK’s Consumer Price Index (CPl) in May reached 9.1%, the highest since 1982. In fact, considering the impact of the current high inflation rate, the actual fixed salary fell by 2.8% year on year.

The UK’s Office for Budget Responsibility said that as wages fail to keep pace with rising food and fuel costs, living standards have fallen to their lowest levels since the 1950s. Therefore, increasing wages should be a critically important policy measure to mitigate the pressure on residents caused by factors such as rising energy bills.

Energy companies and consumers are all in this together. While rising energy prices pose challenges for UK energy companies, there are some actions that can be taken to mitigate impacts. Firstly, energy companies should actively respond to and cooperate with the government to levy “profit tax”, and pay their taxes in full and on time. We can only get through the energy crisis together if energy companies maximise benefits to consumers instead of taking the opportunity to make huge profits. Companies must take into account that consumers are the lifeblood of a business; it is crucial to link corporate behaviour with social and consumer interests to establish a mutually beneficial relationship.

Besides, companies need to strengthen and optimise management and work hard to reduce costs. In the context of fierce and complex global energy competition, energy companies should fully explore their advantages, actively expand into new international markets, and import energy products at relatively low prices. In addition to this, they should play the role of main market participant and actively engage in the implementation of the new national energy strategy formulated by the government, to develop renewable and sustainable resources.

Consumers are not only the bearers of strain caused by rising energy prices but also the main body to break this pressure. Everyone should positively take action to alleviate the pressure of soaring energy bills. For example, we can actively try to reduce food kept in the refrigerator to reduce our energy consumption. We should choose an appliance of the right size for cooking, as using a small pot on a large cooker is a waste of energy. Another way to save energy is to reduce the operating time of the extractor hood and use microwave ovens to heat food rather than a gas cooker. In addition to the above methods, consumers should learn how they can use household energy-consuming devices efficiently in order to develop energy-saving habits. For example, using public transportation, bicycles or walking rather than always choosing to take a car.

In summary, in order to mitigate the energy crisis, it is necessary and critically important for the government, energy companies and consumers to unite, work together, and make every effort to overcome this difficult situation.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.

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