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It is no secret that gas and electricity are getting more expensive. Indeed, Ofgem – the UK’s energy regulator – recently stated that the energy price cap could hit £2,800 in October 2022 (a 42% rise). This would be on top of a 54% rise that already happened in April, which took the price cap to £1,971. As a result, many households are facing “fuel poverty” (i.e. at least 10% of household income spent on energy) in 2022 – projecting to reach 12m people; i.e. double that which currently exists.
Why is energy rising in cost? What does it mean for your financial plan, and is there anything you can do to protect your wealth? Below, our team at Cedar House offers some ideas to help clients navigate this challenging landscape. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or firstname.lastname@example.org
Why are energy prices rising?
The average UK household energy bill stood at around £1,137 in 2018. The picture changed dramatically in late 2021, however. Ofgem, which sets the maximum “cap” that energy suppliers can charge customers, faced difficult decisions as the world faced interrupted supplies.
The war in Ukraine, in particular, was driving up oil and gas prices due to sanctions on Russia (a major producer). Jonathan Brearley, Ofgem’s boss, has stated that the global energy situation is “once in a lifetime” and not seen since the oil crisis during the 1970s.
However, the Russian invasion is not the only factor driving up prices. In 2021, European and Asian countries used higher gas stocks due to a particularly cold winter. Economies also faced soaring energy costs as lockdowns lifted after the COVID-19 pandemic.
Implications for financial planning
On global markets, gas prices have surged by up to sixfold. Currently, almost all UK energy suppliers are charging customers at the new cap (£1,971) to try and maintain a profit (in 2021, the cap stood at £1,278). With prices likely to rise to as much as £2,800 in October, many households face over double the bills they were paying 18 months ago.
The UK average wage currently stands at about £31,000. So, the new price cap could take nearly 10% of someone’s income. Those on lower incomes, of course, will see utilities comprising an even greater percentage. This means less disposable income for households, undermining individuals’ ability to save. The likely result, therefore, is less spending in the UK economy – affecting business sales and earnings.
What you can do
The Government is not unaware of the danger that rising inflation poses to household finances in the UK. It will be keen to avoid a repeat of the 1970s oil crisis, which led to limited economic growth and recession (not ideal as you enter an election). With that said, there is no telling when the economic situation will improve. Energy prices are unlikely to remain static or come down in 2022, and prices may remain high in the years ahead.
Naturally, the first thing you can do is try to conserve energy and limit wastage in your property. Leaving mobile phones to charge overnight, for instance, uses 6.5 kWh of electricity per year. Getting everyone in your house to charge theirs for an hour or two, instead, could make a big difference not only to the environment, but also to your energy bill.
Another idea is to consider improving the overall energy efficiency of your home. The Simple Energy Service has some good ideas for this. Lowering your heating by 1 degree, for instance, could save 10% on your heating bills. Using low energy lighting can also help. Other strategies require more of an investment, such as installing loft insulation and double glazing. Yet, over a longer time period, this could help you save money.
For investors, it is important not to let the energy crisis derail you from your portfolio strategy. Trying to “time the market” based on oil/gas prices, for instance, is usually a bad idea and most people cannot do this successfully, consistently. Be careful not to take money out of the market due to panic, or due to fear over what “might happen”.
Whilst cash may seem like a “safer” way to store wealth right now, inflation is nearing 10% – the highest rate since the 1980s. Interest rates offered by regular savings accounts are nowhere close to this. So, keeping too much in cash at this time is a sure way to lose wealth in real terms, not protect it. With that said, it is a good idea to keep an emergency fund of at least 3-6 months’ worth of living costs, in case you need to make a sudden, necessary expense (e.g. a costly home repair).
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or email@example.com