Cash strapped Brits could face total energy bill increases of 61%

News that senior energy industry insiders are predicting further price rises of up to 40% this year will be a blow to cash strapped Brits, says uSwitch.com. It would mean the average household energy bill hitting a crippling £1,467 this winter - average bills were £912 in January 2008, so in total, consumers are looking at a 61% or £555 increase in household energy bills in a year.

A further 40% increase in energy prices would also plunge an extra 1.6 million into fuel poverty, taking the total to 6.1 million - a 36% increase.

Mervyn King, Governor of the Bank of England, warned consumers yesterday to brace themselves for ‘the most difficult economic conditions in two decades'. He indicated that take home pay would stagnate, but inflation was set to rise and economic growth and house prices were likely to fall. It is predicted that further rises to food, petrol and energy prices could see inflation top 4%.

Mr King said the Bank of England was ‘prepared to take whatever action is needed' to bring inflation down - meaning interest rate rises cannot be ruled out as a measure to clampdown on inflation. The only certainty is that families will increasingly struggle to meet their essential living costs and that worsening economic conditions will restrain consumer spending even further.

The bad news is that the spike in energy prices does not look like a temporary situation and consumers will have to adjust to paying far more for their gas and electricity. According to the Bank of England, wholesale gas prices have increased by 160% in the year to May. But unfortunately suppliers haven't caught up with the increase in prices - as they have yet to pass these on to consumers - and any respite from a downward trend in prices as demand drops during the summer months has, as yet, failed to materialise.

Even if bills hit £1,467 by the end of 2008, consumers may not be over the worst. If current wholesale gas trading prices continue at £1 per therm, this could translate into a further 10% to 15% going onto household energy bills in the first half of 2009.

Of most concern is the fact that BERR has felt the need to reflect current trends by introducing a new modelling scenario called ‘High High' when looking at the future of wholesale gas prices. In the ‘High High' scenario the average wholesale price is 67 pence per therm for 2010, increasing to 92 pence per therm in 2015. The fact that such a situation is considered feasible enough to warrant BERR building a scenario around it is enough to set warning bells ringing.

The UK also has a lack of storage capacity, which means it has to turn to Europe when demand for energy exceeds available supply, leaving it vulnerable. Year ahead wholesale gas prices in the UK are 16% higher than in Europe and consumers in this country have seen price rises this year outstrip those made in the continent.

The news will be a blow to the Bank of England, which only this week revealed that CPI inflation has hit 3.3%. In his letter to the Chancellor, the Governor of the Bank of England said that the sharp increase in inflation from 2.1% in December to 3.3% in May was largely down to the increased cost of food, fuel, gas and electricity, which alone ‘account for 1.1 percentage points of the 1.2 percentage points increase in the CPI inflation rate since last December.'

But arguably the biggest blow will be for consumers, who are already struggling with falling house prices and rising food and fuel costs. While net salaries have increased by £44 a month on average this year, household expenditure on essentials such as fuel, energy, food and mortgages have increased by £148 a month - a 9% increase on the cost of the same items in 2007.

Ann Robinson, Director of Consumer Policy at uSwitch.com, says: "The days of cheap energy are over. Households could see the largest ever increase in household energy bills this year. If suppliers do increase bills by a further 40% by this winter then consumers will have seen a 61% or £555 increase in household energy bills in a year. If average energy bills do hit £1,467 by the end of 2008, spending on energy will account for 5% of the average household's net income.

"This is going to cause huge financial pressure and consumers will naturally expect their salaries to increase to help them meet the spiralling costs of living and working in Britain. The Government knows that this will simply exacerbate the situation, but it will have one hell of a battle on its hands trying to dampen down wage expectations. The outlook is grim.

"Consumers cannot afford to ignore this - they need to take action now to stand any chance of limiting the impact of higher prices. Online energy plans remain a good option for those who want to pay a lower price now and are happy to take their chances on the market in the future. However fixed or capped price plans could be a lifeline for those who are more vulnerable to price rises. These plans carry a premium, but if you've never switched before you will probably still save money immediately by moving to one. However, the best fixed and capped deals are disappearing fast so consumers need to act quickly."

For more information visit uSwitch.com.