Energy crisis: UK households hardest hit in Western Europe, IMF says | Energy bills
The energy crisis is hitting UK household budgets harder than any Western European country, according to an analysis by the International Monetary Fund. The difference between the cost burden on poor and rich households is also much more unequal in the UK compared to other countries.
The reason is the UK’s heavy reliance on gas to heat homes and generate electricity at a time when Russia’s war in Ukraine has sent gas prices skyrocketing. Additionally, the UK has the least energy efficient homes in Western Europe.
Utilities widely agree on the best solutions: a large-scale and rapid insulation program and faster deployment of wind and solar power, which produce electricity that is currently around nine times cheaper than gas, as well as short-term financial support for bill payers. Over the past decade, the government has consistently failed to implement major insulation programs and effectively banned onshore wind.
The IMF analysis assessed the impact of the energy crisis expected over the whole of 2022, based on anticipated fossil fuel prices in May, when prices rose. He revealed that the average UK household is set to lose 8.3% of their total purchasing power in 2022, due to higher energy bills. The figure in Germany and Spain is 4%, while only Estonian and Czech households face higher impacts than in the UK across Europe.
Rising energy bills also push up the costs of other goods, as sellers pass on price increases. These indirect effects will reduce the money UK households have to spend by another 2% in 2022. The IMF analysis accounts for people who reduce their energy consumption as prices rise.
“The distributive impact is particularly biased [in the UK]said IMF’s Oya Celasun. The poorest 10% of UK households are expected to spend 17.8% of their budget on energy in 2022, while the richest 10% will spend 6.1%, according to the analysis. The difference of 11.7 percentage points is by far the largest disparity among the 25 European countries assessed. In France the difference is 3.9 percentage points and in the Netherlands 2.5.
Deutsche Bank analysis also shows that UK bill payers are being hit hard by the energy crisis. It revealed that consumer price inflation for gas and electricity in the UK in 2022 is expected to be around 80%, compared to an average of 40% in the 19 countries that use the euro.
“The UK has higher energy prices than other European economies,” said Sanjay Raja, chief UK economist at Deutsche Bank. “The fact is that the UK is more dependent on gas.”
The vast majority of homes in the UK – 85% – use gas to provide heat, a legacy of exploiting the North Sea gas fields, which are now in decline. In France and Germany, less than 50% of homes are heated by gas.
The UK also relied on gas to produce more terawatt hours of electricity in 2021 than any of the 39 European countries analyzed by think tank Ember, except Italy. Electricity generated from gas is the most expensive for electricity and sets the price for all electricity, due to the current structure of the UK market.
In terms of the share of electricity produced by gas, the United Kingdom is at 40%, Germany at 15% and Denmark at 6%. “The UK energy crisis is a fossil gas crisis,” said Sarah Brown at Ember. “The UK’s reliance on fossil gas is punishing ordinary people.”
“Another key difference is that homes in the UK are incredibly inefficient,” said Lisa Fischer of think tank E3G. Leaking homes in the UK are the less effective in Western Europeaccording to an analysis: UK homes lose 3C in temperature while German homes only lose 1C. People living in two-thirds of UK homes that are energy inefficient, D-rated or worse, will pay at least £1,000 more this winter.
The solution to the UK’s energy crisis is much better insulation, replacing gas boilers with heat pumps and accelerating the deployment of renewables, Raja said. Short-term measures include reduce flow temperature on condensing gas boilers and replacing household appliances with more energy-efficient models, Fischer said.
Additional financial support for UK households will also be needed, but the IMF’s Celasun said this should be targeted at vulnerable households: “For example, it would be full compensation for the poor and the support could be phased out to as income increases. She said fully compensating price increases for everyone would remove a strong incentive to use less energy, reducing both the costs and carbon emissions of climate heating.
Jess Ralston, from the Energy and Climate Intelligence Unit, said: “The government currently has no serious plan to reduce our dependence on gas, so the new Prime Minister should rapidly accelerate existing energy efficiency programmes. With the price of gas so high, the return on this investment would be extraordinarily fast.
Increasing gas supplies from the North Sea would not translate into sufficient quantities to reduce energy prices, which are set internationally, Raja said: “When it comes to the Kingdom Kingdom and energy, we are price takers”. Fischer also dismissed the idea that fracking in the UK could alleviate the energy crisis, calling it “nonsense”.
“It’s really important to start planning actions now because we know next winter will likely be at least as tough, if not tougher than this winter,” Fischer said. “Germany is starting to align, especially on financing building efficiency and switching to heat pumps. In the UK there’s an absolute lack of trying to do those things that help you permanently insulate people from higher energy prices.