Lessons from the Northern Ireland energy price crisis

With a small gas network and the absence of a price cap, many Northern Ireland consumers saw their energy costs double in a fortnight at the start of 2022. Peter McClenaghan, director of infrastructure and sustainability for the Consumer Council for Northern Ireland, explains what impact this has had and the lessons for Great Britain’s energy market.

Within a fortnight of the Russian invasion of Ukraine, energy prices for two-thirds of households in Northern Ireland had doubled. These households use kerosene for home heating which local distributors supply by tanker and who, in turn, purchase the oil for immediate delivery.

While prices have since dropped back to around 80% above the ten-year average, the extreme rise demonstrates the peril of having consumers subject to global spot market prices for their essential energy needs.

The benefits of regulation

The fact that the supply market for kerosene home heating oil in Northern Ireland is only subject to limited self-regulation has understandably come into focus again in recent months.

The Competition and Markets Authority (CMA) recently compared Northern Ireland’s off-grid consumers to the majority of UK domestic energy users, highlighting that the former group do not benefit from standard protections including debt support, a priority services register to address consumer vulnerability, or a requirement on suppliers to provide energy efficiency advice.

The CMA also noted the lack of formalised regulations on charging, the lack of access to mandatory independent alternative dispute resolution, and the limited payment options available to heating oil consumers which is particularly important given consumers must make bulk purchases of at least £250 of heating oil at current prices.

Price cap counterfactual

While Northern Ireland is a test case for the need for regulation, it also provides the counterfactual to the Ofgem price cap.

The Northern Ireland gas supply market does not have a price cap. Rather, the largest supplier in each network area is subject to a price control and tariff review process during which they must open their books to scrutiny by the Utility Regulator, the Consumer Council and the Northern Ireland Department for the Economy. Their tariff then acts as a price to beat for other suppliers.

The tariff review process, routinely undertaken bi-annually or if tariff input costs change by more than 5%, is used to determine the maximum average tariff price and assess any permitted retrospective adjustments, including to the wholesale cost of gas.

In one of Northern Ireland’s three network areas, the increase in the wholesale cost of gas has led to five tariff review processes in the last 13 months.

The Northern Ireland regime has distinct benefits which include clarity for consumers as to the 2% profit margin suppliers are permitted, a lack of market disruption resulting from suppliers exiting the market, and the ability to ensure consumers are the first to benefit if, and when, price reductions come.

However, the hedging strategies and liquidity of the respective suppliers under review has led to large variations in tariffs across network areas, something consumers have found difficult to understand.

In the network area where tariffs are highest consumers’ dual fuel bills have been nearly £2,000 since February and will increase another 15% in early May.

Fuel Poverty

Northern Ireland has historically had higher levels of fuel poverty than England. Northern Ireland’s most recent official estimate of fuel poverty assessed in 2018 was 18% while England’s official rate was 13.2% in 2020.

In December 2021 the Consumer Council undertook research that estimated fuel poverty at 31%. Between December 2021 and March 2022, our Home Energy Price Index shows energy prices increased by 48% so it is no surprise that the latest Utility Regulator estimate for fuel poverty is a staggering one in two households.

In September 2021, anticipating a winter of high energy prices, we undertook research into the establishment of a first fuel bank for Northern Ireland. Armed with this research we used our statutory position in the energy market to engage with companies to encourage them to fund the proposal to provide emergency assistance to households at immanent risk of disconnection. We also succeeded in encouraging the Northern Ireland Department for Communities to match fund company donations ten-fold, meaning supplier donations of a quarter of a million pounds were effectively covering the administrative costs.

On its launch the charity run fuel bank scheme received unprecedented demand which it initially struggled to deal with. Resultantly it received media criticism, in part due to an incorrect perception that it was to be the only government provision available at a time of severe need.

The scheme has proven to be highly successful and has been augmented by a further £50 million government support fund distributed to individuals on qualifying benefits. However, Northern Ireland consumers will need greater support next winter to address growing fuel poverty which is being deepened by wider cost of living challenges.

Lessons for Great Britain

Northern Ireland’s experience of the energy crisis to date indicates the level of support consumers in Great Britain will require if the price cap increases as predicted in October. Not only was the demand for the Consumer Council advice and complaints handling service 70% higher in February 2022 than pre-pandemic (February 2020) but the magnitude of individual need and distress has also risen markedly; patterns witnessed by all our local energy suppliers, debt advice centres, and charities.

Consumers contact us for confirmation that they’re being billed correctly as they find the prices hard to fathom, for advice on energy efficiency and switching, and for guidance on where to turn for debt support and financial assistance. Suppliers should be prepared for a significant uplift in all these types of requests and, ideally, government will have significant financial support in place to address the hardship so many households will experience.

If fuel poverty in Great Britain reaches anywhere close to the level Northern Ireland is experiencing, suppliers should plan for engagement with a whole new cohort of newly vulnerable households who have never required help before and another cohort of angry customers who, while not in major hardship, are being faced with cutting back at Christmas or forgoing the family holiday to pay their bills.

Trust and net zero

Despite such hardship and the significant media attention on energy due to constant price increase announcements, we have seen no evidence that consumer knowledge of the sector is being enhanced. Rather, we have seen significant misunderstanding, misinformation, and growing consumer distrust in the sector.

Our research into consumer attitudes in Northern Ireland’s large, unregulated off-grid sector provides an indication of the low levels of consumer trust in suppliers operating in an unstable market. If credible solutions are not found to address the market instability, fairness, and affordability issues emanating from this crisis we risk a significant and wide-ranging erosion of trust in the energy sector that could have a profoundly negative effect on our collective efforts to encourage consumer behavioural change in the pursuit of decarbonisation.