Poorest households could spend 37% of budget on energy from April before summer reprieve

The pain of higher energy bills isn’t over yet as a 43% price hike is just round the corner, says interactive investor.

The latest data from the energy sector suggests that households are facing another sharp rise in energy bills before they finally start to come down by summertime.

The uptick is mainly driven by the increase in the maximum unit costs and daily standing charges under the government’s Energy Price Guarantee (EPG) from April from £2,500 per year to £3,000 per year for a typical home, and the loss of the £400 energy discount scheme which is set to come to an end at the same time.

Poorer households are hit harder than wealthy households when it comes to rising energy costs. When factored into the other key areas of household expenditure, including food, housing costs (rent or mortgage) and transport, interactive investor calculates that the poorest 10% of households face spending 26% of their budget on energy bills from April, or up to 37% of their budget if they have a big household or live in a larger home.

This is up from the current levels of 16% for poorer households in an average-sized house and 25% for low-income households in a larger home. Meanwhile, lower-income families in a small home will see their energy costs rise from 9% to 18% of their household budget in April.

People often moved into their current homes at a time when energy prices where more affordable and pensioners and larger families sometimes live in larger homes, despite having a limited income.

Middle-income families will also see their energy costs soar and face spending 13% of their budget on energy bills from April, or up to 18% of their budget if they live in a larger home. This is up from 8% and 12% respectively. Meanwhile, middle-income families in a small home will see their energy costs rise from 4% to 8% of their household budget in April.

In contrast, wealthy families have more financial wriggle room. The wealthiest 10% of households will spend 6% of their household budget on energy from April, rising to 8% if they live in a large home. Meanwhile, wealthy households in a small home will see their energy spending increase to 4% of their household budget in April, compared with 2% currently.

The calculations factor energy price projections by analysts Cornwall Insight and applies them to data on household expenditure from the latest ONS Family Spending Survey, which has been uprated in line with average wage inflation over the past year (6.4%).

Summer reprieve

Ofgem’s latest energy price cap, which is set to be announce on Monday, 27 February, is expected to remain above the government’s EPG cap from April, before falling to well below the £3,000 EPG level in the second half of 2023.

This would result in cuts in household bills as prices are capped by whichever is lower, the EPG or the price cap rate. Analysts Cornwall Insight say a typical bill will drop back to £2,153 in July.

Based on these forecasts, interactive investor calculates that the budget allocation to energy bills for the poorest household will fall to 13% for those living in small homes, 19% for medium-sized properties and 26% for large abodes,

Middle-income houses could see their energy costs fall to 6%, 9% and 13% of household budget spend, respectively, while high-income households will continue to pay a small fraction of their budget on energy (3%, 4% and 6% for small, medium and large homes, respectively).

Source: Ofgem, ONS Family Spending report, Cornwall Insight. Calculations by interactive investor.

Assumptions: household budget increases 6.4% in line with average wage inflation

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “It is shaping up to be another awful April for households, with key areas of household expenditure set to rise. As households will no longer receive money off their energy bills from spring, the upcoming increase to the government’s EPG cap will feel even more painful – especially for poorer households who spend a greater portion of their salaries on energy bills. Meanwhile, increases to council tax, broadband prices, mobile phone tariffs, water and sewage bills are set to pile on more financial misery.

“Wholesale energy prices have fallen their peak back in summer 2022, but there has been an excruciating lag before these feed through to households. But households are set to have a glimpse at the light at the end of the tunnel come summertime, if energy prices fall back to a level which will make the EPG redundant.

“Forecasted falls in energy bills could prompt a much-needed return of decent competition in the energy market, with competitive fixed-price deals overdue a comeback. However, suppliers might not be in a rush to offer more competitive deals, and any return of competition to the market is likely to be slow.

“The easing in price rises can’t come soon enough for struggling households, The worst of the energy crisis could be receding, but there a still a long way to go before this once-in-a-generation type bout of high inflation subsides. Even if prices fall in July as per Cornwall Insights forecast, they will still be almost 70% higher than in winter 2021-22. Crucially, it is important to remember that annual bills are not capped – it’s the amount you pay for every KWH you use that is. As such, households which use more energy will pay more and the reverse is true for those which use less.

“It remains important to pay extra attention to your financial well-being and consider what protective steps you can take now to avoid money worries later. If you are struggling to pay your energy bills, contact your energy supplier to ask for support as your first port of call. It is worth consulting a debt advice charity such as StepChange or Turn2Us and they will go through all of your options.

Alice Guy, Personal Finance Editor, interactive investor, says: “The pain of higher energy bills isn’t over yet as a 43% price hike is just round the corner. Energy for the average household is due to soar from £2,100 to £3,000 per year from 1 April 2023, as the energy price guarantee rises and the £400 discount ends. The current energy price guarantee is £2,500, but households have also received £400 of extra energy support from the government, bringing their total energy cost to £2,100.

“In reality, there’s no such thing as an average household and everyone’s energy costs will be slightly different. The energy price guarantee is actually a cap on the amount you pay per unit of fuel, so your bill will still be linked to how much you use. Bigger households and households with larger or less energy-efficient homes could end up paying much more than average-sized households. A household with a 4-5 bedroom house will soon be paying £4,254 per year for their energy, or £355 per month from 1 April rather than £3,000 per year, or £250 per month for the average household.

“The good news is that a warmer winter than expected means wholesale energy prices are falling, and we should see our energy costs dropping by the summer. Unfortunately, lower prices take months to feed through to customers as energy companies buy their energy months in advance.

“Until April 2024, households will pay the lower of the government’s energy price guarantee of £3,000, or the energy price cap, set every three months by Ofgem. At the moment the energy price guarantee is lower than the energy price cap, but by July the energy price cap is likely to drop to £2,153, bringing down our energy costs.”