UK households face £18b increase in energy bills

[LONDON] UK households are set for an £18 billion (S$32.5 billion) increase in energy bills next year, potentially squeezing consumer spending and adding pressure on the Bank of England to increase interest rates, according to Investec.

A surge in gas prices has left the energy price cap - the ceiling for what firms can charge most customers - on course to increase by 56 per cent in April, to an average of £2,000 per household a year, analysts Nathan Piper, Sandra Horsfield and Martin Young wrote in a report.

The increase could add 1.8 percentages points to headline inflation in April. The total increase also equates to about 1.3 per cent of consumer spending, forcing Britons to reexamine their consumption patterns.

It comes as the government opened a consultation on Tuesday to help fix the country's beleaguered energy market, where 24 household suppliers have gone bust since early August.

The cost of redistributing and paying for those customers is spread across the industry, including a £1.7-billion tab for Bulb Energy, the largest casualty of the energy crisis. Energy regulator Ofgem has predicted that the collapse of suppliers will add between £80 and £85 to energy bills through 2022 and 2023.

UK inflation jumped to 5.1 per cent in November, the highest rate since 2011, prompting the central bank to raise borrowing costs this month for the first time since the start of the pandemic.

A further energy-drive increase in inflation could prompt more action from the BOE, the Investec analysts wrote.

To cover the increase in bills, households would have "cut back on discretionary spending on other items, eat into their excess savings built up during the pandemic" or "obtain higher wages from employers," Investec said.

While that is "plausible to some extent given the generally tight labour market," it risks adding "further to inflation pressures and perhaps prompting further rate rises by the Bank of England," the analysts said.

BLOOMBERG