The impact of rising energy prices on households

2nd February 2022

From the Office for National Statistics.

The cost of living is rising for households across the UK, with energy prices a major contributor. This article explores how households are being affected by these rises, including a disproportionate impact for those on lower incomes.

The wholesale price of gas is currently around four times higher than in early 2021, with significant rises through the latter half of the year, and, with gas also used to fuel around a third of the UK's electricity generation, rising gas prices have in turn led to rising electricity prices. Gas and electricity inflation rates are also at record high levels.

After the energy price cap rose in October, consumer prices for gas and electricity rose by 17.1% and 8.7% respectively, and costs could rise even further when the new rate is implemented in April.

Main points

While rising energy prices will affect most households across the country, they are more likely to disproportionately affect those on the lowest incomes who typically have less flexibility in their spending and are more likely to be in fuel poverty.

Spending on gas and electricity is also higher as a proportion of disposable income for the poorest 10% of households (7%) compared to those in the richest 10% of households (2%).

According to data from our Opinions and Lifestyle survey (OPN), two thirds (66%) of adults in Britain report their cost of living increased in the latest month (December 2021 to January 2022), with 79% of those citing higher gas and electricity bills.

Almost a third (32%) of those who said their cost of living had risen are cutting back on their use of fuel such as gas or electricity. More than half (53%) said they were spending less on non-essentials, and around a quarter (26%) using their savings.

From the Report
Household energy costs rising sharply 
The wholesale price of gas (system average price) in January 2022 was almost four times higher than in early 2021, with large rises since summer 2021.

According to National Grid data, the seven-day average price reached highs of 12.8p per kilowatt hour in December 2021, more than eight times higher than the same period the previous year (1.5p).

It has since fallen back to around 6.5p, with daily prices remaining volatile over recent weeks. 

Energy suppliers can buy gas and electricity at a pre-agreed price (such as forwards and futures contracts), to help reduce the impact of day-to-day market volatility.

The wholesale price of gas was around four times higher than at the start of 2021 

As the global economy restarts after pandemic-related lockdowns, limited stocks of natural gas and supply constraints have driven prices higher.

The UK imports around 50% of its gas from the international market, and most homes in England and Wales are heated by mains gas supply. 

Gas is also used to fuel around a third of the UK's electricity generation, so rising gas prices have in turn led to rising electricity prices. 

Some households were sheltered from these rises over the winter because of the Ofgem price cap. 

The cap places a limit on prices for customers on default tariffs to "keep prices fair" and protect them from market volatility. It is reviewed every six months.

Since the summer of 2021, 25 energy suppliers have gone out of business and one entered special administration, mainly because of substantial rises in wholesale energy prices.

In response Ofgem are consulting on new proposals to ensure the cap reflects the "costs, risks and uncertainties facing energy suppliers". 

After the energy price cap rose in October 2021, consumer prices for gas and electricity rose by 17.1% and 8.7% respectively. 

Currently 12-month inflation rates for gas and electricity are at their highest level since early 2009, with gas at 28.1% and electricity at 18.8%. 

Gas and electricity price movements are closely tied to the Ofgem price cap 

Cost of living squeeze 
The rising cost of energy bills is not an isolated issue for household budgets. 

Inflation is rising across many areas of life, with the Consumer Prices Index including owner occupiers' housing costs (CPIH) rising by 4.8% in the 12 months to December 2021.

The largest upward contribution came from housing and household services (1.31 percentage points, of which 0.59 percentage points came from electricity, gas and other fuels).

With increasing pressure on budgets, two thirds (66%) of respondents to the latest Opinions and Lifestyle Survey (OPN) in January said their cost of living had gone up in the last month. 

Of those, almost 9 in 10 (87%) said the price of their food shop had increased, and 8 in 10 (79%) said gas and electricity prices were a factor. 

Higher energy bills and food prices are the main contributors to rising living costs

As a result, almost a third (32%) of those who said their cost of living had risen are cutting back on their use of fuel such as gas or electricity. More than half (53%) said they were spending less on non-essentials, and around a quarter (26%) using their savings.

The impact of COVID-19 is also being felt in various ways, with 14% of adults reporting their household finances had been affected in the previous seven days according to the latest OPN (6 January to 16 January 2022).

Of those who said they were working from home at least once in the previous week because of the COVID-19 pandemic, more than four in five adults (82%) said they were spending more on utility bills, when interviewed by the OPN in November 2021.

This cost is likely to be offset among homeworkers, whose spending overall is more likely to have fallen because of the pandemic.

Nearly half (49%) of people who worked from home at least once in the previous week (OPN, 3 to 14 November) said their spending has reduced because of homeworking since the start of the pandemic, while just 14% said their spending had risen.

Impact to fall hardest on lower income households 
While rising energy prices will affect most households across the country, they are more likely to disproportionately affect those on the lowest incomes.

In the financial year ending in 2020, the poorest 10% of households spent more than half (54%) of their average weekly expenditure (£298.90) on essentials such as housing (including electricity and gas), food and transport.

Those in the richest 10%, in comparison, spend 42% of their average weekly spend of £1,073.20 on the same essentials. 

Spending on gas and electricity is also higher as a proportion of disposable income for those in the poorest 10% of households (7%) compared to those in the richest 10% of households (2%).

As a result, an increase in energy prices disproportionately impacts low-income households. 

Spending on gas and electricity as a proportion of disposable income is highest for the poorest households.

Read the full report with many links to more data HERE