UK energy crisis is 'bigger than the pandemic'

London(CNN Business) The United Kingdom will have to find an answer to soaring energy bills soon or risk a humanitarian crisis. But freezing gas and electricity prices over the next two winters could cost the government over £100 billion ($118 billion), more than it spent paying millions of people's salaries during the pandemic.

Earlier this year, the UK government tried to protect households against 90% of the expected increases in energy bills through tax cuts, energy bill rebates and direct payments. But natural gas and power prices have shot up since then, as have forecasts of future increases.

Researchers at the Institute for Government said Tuesday that the government would need to spend an extra £23 billion ($27 billion) to protect households against about 90% of the expected rises in energy bills until April 2023. Offsetting the same proportion for the year to April 2024 would cost another £90 billion.

That forecast chimes with the cost of a proposal by Scottish Power, one of the UK's biggest energy companies. It has called on the UK government to protect millions of households by freezing their bills for two years, according to report by the Financial Times.

The average annual bill currently stands at £1,971 ($2,318) — up 54% so far this year — but is forecast to shoot past £3,500 ($4,117) when the upper price limit is fixed Friday for the last three months of this year. Analysts at Auxilione, a research firm, say the average household could be paying as much as £6,433 ($7,579) a year for natural gas and electricity come next spring if the government doesn't intervene.

Scottish Power says the UK government should cap energy bills at £2,000 ($2,356) and give money to suppliers to meet the much higher costs of gas and electricity on wholesale markets.

The £100-billion cost of the subsidy would come from increased government borrowing, funded by general taxation over the next decade or more, the Financial Times said, citing unnamed sources familiar with the matter.

"It is going to be truly, truly horrific for a large number of people," Keith Anderson, CEO of Scottish Power told STV, a Scottish TV station, on Monday, referring to the price increases.

"This is bigger than the pandemic. It's a big national crisis," he added.

The company did not immediately respond to CNN Business' request for comment.

The UK government's pandemic furlough scheme, which ran for 18 months, cost almost £70 billion ($82 billion). In March 2020, when the outbreak of the coronavirus pandemic shuttered businesses, the government agreed to subsidize workers' salaries to prevent mass layoffs.

So far this year, the government has offered about £33 billion ($39 billion) in support to households to help with energy costs, through a mix of tax cuts, energy bill rebates and direct payments, the Institute for Government said in its report published Tuesday. The UK government says it is doing more.

"We know the pressures people are facing with rising costs, which is why we have continually taken action to help households by phasing in £37 billion worth of support," a spokesperson for the Department of Business, Energy and Industrial Strategy said.

"We are giving a £400 discount on energy bills this winter and eight million of the most vulnerable households will see £1,200 extra support. While no Government can control global gas prices, over 22 million households are protected by the price cap, which continues to insulate households from even higher prices," the spokesperson added.

But alarm is spreading within the UK energy industry. On Tuesday, Philippe Commaret, an executive at France's EDF, a major player in the UK market, told the BBC that, without more support, about half of UK households could fall into fuel poverty from the start of next year, meaning that they would have to spend more than 10% of their disposable income on energy.

Leaders of the UK National Health Service warned last week of a "humanitarian crisis." Many people could fall sick this winter as they "face the awful choice between skipping meals to heat their homes and having to live in in cold, damp and very unpleasant conditions," they said.

Wholesale natural gas prices started increasing last year as countries reopened from their pandemic lockdowns, causing a global spike in demand.

Russia's invasion of Ukraine in late February, and the resulting energy crunch, has only pushed prices further up. Western countries have banned Russian coal and oil imports, and Europe is desperately trying to wean itself off Russian natural gas.

June was the first month on record that the United Kingdom did not import any fuel from Russia, traditionally one of its major suppliers, according to data released Wednesday by the Office for National Statistics.

Eye-watering prices have caused 29 smaller energy suppliers in the UK to go bust since last summer. Those that have survived have passed on much of the cost onto their customers.

— Benjamin Brown contributed reporting.