People need to be paying more for power now, a professor said (Image: Getty)
An economics professor has given key advice for anyone who is a customer of Octopus Energy, British Gas, OVO Energy, E.ON Next, EDF Energy, and Scottish Power to do immediately. Stuart Mills Assistant Professor of Economics, University of Leeds spoke out as people are facing massively increase bills as the price of power soars, caused by the conflict in the Middle East.
It comes after personal finance expert Martin Lewis urged people to get onto fixed deals as soon as possible. Prof Mills said people should take the time now to ‘get ahead’ with their bills to avoid a big shock later.
Writing on The Conversation academic website he said: ”The conflict in the Gulf is just the latest shock to the energy supply chain. And the tricky thing with supply chains is disruption takes time to be felt. Even if a peace deal sticks, consumers and businesses can still expect higher prices to ripple through the energy market for months.
“As such, think about the behavioural economics of what’s known as ‘intertemporal choice’ – your spending over time. People often excessively discount the future and focus on the present when choosing how to spend money. This is known as “present bias”.
“Today, there are widespread expectations of higher energy prices, but (for now) they remain around pre-war prices. In the future – when the war is over – there will be widespread expectations of lower prices, but the current disruptions will still be rippling through the system. This mismatch between expectations and reality could leave people with a nasty surprise when their bill comes through.
“So, pay it forward. Don’t fall into the trap of present bias. If you can, increase your energy bill payments today. Economists call this “smoothing out” your consumption. When higher bills bite, you’ll be (psychologically) better off for it.”
Mr Lewis told anyone with a price cap tracker account for home power to switch their tariffs ‘right now’. On the rises, he told host Newsnight Victoria Derbyshire: “This is all about timings. Of course, this is not just about the spike that we’re seeing in oil and gas prices. It’s about how long that spike lasts for. The longer it lasts for, the worse the situation gets. Now the imminent problems – we’ve already seen petrol and diesel prices go up. Although the percentage rise isn’t that high, it won’t be very pleasant for people. The most painful rise that we’ve seen is in heating oil, and LPG oil.
“Ultimately, the decision here is really tough. Now, if you’ve got enough oil and LPG left, you could, of course, wait this out and hope that things are going to get better, but there is a realistic chance that things are going get worse. This is a global economic problem on the back of a huge conflict in the Middle East, and none of us know which way that’s going to go forward.”
The key date is at the end of May, Mr Lewis explained: “Now, the real issue on energy bills, and this is what everybody needs to understand, and the real political issue on the energy bills, will come at the end of May not the end of June. That is because at the end of May we get the announcement for the July price cap. Now almost certainly at this point, that July price cap will be more expensive than the April price cap. However, how much more expensive depends on how long this lasts for. If, when the May price cap is announced, wholesale rates have dropped back to normal, then even though the July price cap will go up, the government would be able to say, look, it’s going up, but it’s going up in the lowest use period of the year, April to October, and it should come back down again in October.
“If though, we’re in May when that price cap is announced and we’re still in this position or potentially a worse position, that’s the ticking time bomb. Because at that point, there won’t be any cheap fixes available, we’re going to have an announcement that the July price cap will go up, and we will be in the assessment period for the October to December, getting up for winter price cap and that will look like it’s going to stay high too. And that’s when the calls will start to come for the government to start to look at intervening in the energy market.”
Mr Lewis has urged customers of energy firms to switch their tariffs. Writing on X, Mr Lewis warned: “Important: If you can get off the Energy Price Cap right now, you should and urgently!” “The wholesale gas rate is spiking due to the Iran conflict, and it is a prime driver or UK elec prices. If that’s sustained (big if), it will likely push the Price Cap rate up from July
“Some of the cheap fixes from before the weekend haven’t (yet) been pulled, so you can still lock in a rate at around 14% less than the current Price Cap, both saving you money and giving peace of mind that the rate can’t rise. You can do a whole-of-market comparison via http://cheapenergyclub.com
“However, many firms are reassessing their fix prices today and may reprice their deals upward. There’s a risk many of the current cheapest fixes will be gone by this time tomorrow. Plus, fix now, and unprecedentedly the rate you lock in at will be reduced on 1 April. This is because govt is changing the underlying way energy bills work and moving some policy costs to general taxation. That reduces the elec and gas unit rates even for those already on fixes. So even if you fix now the amount you pay will drop by 7% to 9% on typical usage on 1 April.
“Fixes are available for most payment methods except prepay. Those on smart prepay can look at the EDF Simply Tracker tariff, which is effectively a price cap tariff with £100 lower Standing Charges (and £70 extra cashback on top via the link above). PS How to know if you’re on a Price Cap? The Price Cap only applies to firms’ Standard Variable tariffs. It’s the default tariff you’re on if you haven’t chosen another deal, or your deal (eg a fix) ended and you did nothing. If you’re fixed, on an EV tariff, a time of use tariff, or other specialist tariff, you are not on the Price Cap.”
