How are customers keeping up with essential bills during the cost-of-living squeeze?

Consumers are starting to see some respite from the cost-of-living crisis with reducing energy bills and inflation. Many hope this is a sign of the end of the cost-of-living crisis, albeit it’s likely still a way off. The Resolution Foundation (1) suggest that although the cost-of-living crisis will ease in 2024, real wages are not expected to return to their Q1 2022 level until the end of 2027. However, now that we’re 2 years into the challenge, are customers managing to keep up with essential utilities bills? How much debt, if any, has accumulated? How are customers prioritising their bills and has this changed? Have the Regulators implemented any changes that appear to have impacted these trends?

The recent dear CEO letter from Ofgem, Ofwat, Ofcom and the FCA (2) continues to re-enforce the regulators' focus on supporting customers struggling with bills. The letter cites results from the FCAs financial lives research survey; ‘11% of UK adults have missed payments on any domestic bill”. This research is based on survey responses. By contrast, Experian insights into actual missed payments over a similar period shows that around 5% of adults have fallen into arrears (by 2 months or more) on their obligations in the last 6 months (including utilities, telecommunications, credit cards, loans, mortgages etc.), which remains below the pre-pandemic levels. The level of impact of the cost-of-living crisis on consumers is a hotly debated topic and these stats provide context and may differ due to definitions or perhaps raise a question about consumers’ perception versus reality.

This blog aims to explore the impact of the cost-of-living challenge against 3 core essential bills metrics. Before delving into this, a word on terminology. The phrase ‘essential bill payments’ is misleading and would typically include council tax, for example. Therefore, to make this article as succinct as possible, and avoid using the phrase ‘energy, water, mobile phones, fixed line and broadband bills’, I’m using the term, ‘essential utilities bills’.

Experian Insights – Is the cost-of-living crisis resulting in more customers struggling to pay their essential utilities bills?

The 3 key metrics that need exploring to answer this question are:

1. Are most consumers up to date on their essential utilities bill payments and are more falling into arrears recently?

Experian’s latest insights continue to show that the vast majority of customers are ‘up to date’ on their essential utilities bills; with over 90% of accounts up to date in any month. The percentage of customers who are starting to fall behind on their essential bill payments has risen over the last year (after significant falls during the pandemic) and is now at or slightly above the pre-pandemic level. Taking energy, for example, prior to the pandemic the percentage of accounts that fell 1 or 2 months behind on their payments had been stable for around 3 years. The latest early arrears rates are practically identical to this pre-pandemic ‘norm’ with a more pronounced increase in the latest month. Although the overall level of early arrears for water payments is slightly higher than for energy, the trend is similar (without the latest spike). Within telecommunications, current arrears levels have just nudged above pre-pandemic levels.

2. Is the Average Balance of Essential Utilities Bills Increasing due to compounding debts?

Energy and water suppliers often wrap ‘debt’ into a future monthly instalment combined with consumption payments. This makes it difficult to track as ‘debt’ as it is no longer in arrears. Is the average balance recorded at Experian increasing and showing the impact of the cost-of-living challenge masking a rising debt problem? Taking a deeper look into the data on this for energy and water shows a marked increase over the last year. Largely this fell below the level of inflation and increase in energy costs, though over the most recent quarter it increased by 30% in comparison to the same period last year. Ofgem’s data portal[2] also shows similar trends for customers in debt with and without debt repayment plans. Ofgem cite that, for customers in debt without payment plans, “The last year has seen substantial increases in average arrears, reaching ￡1,214 for electricity and ￡965 for gas in Q1 2023 (up by 40% for electricity, and 34% for gas compared to Q1 2022). The increase in average arrears in the last four quarters has presumably been driven by higher retail prices and increasingly difficult financial circumstances faced by some households”.

3. Forbearance and extended payment arrangements.

Customers that accumulate a debt on their bills, agree a repayment plan and are unable to repay within a reasonable period (typically 12m for energy and water bills), have arrangements recorded at a credit reference agency. Customers who take a prepayment meter to repay debt for energy are typically recorded as arrangements. Experian continues to see increases in the volume of customers on arrangements (i.e. in a state of forbearance) for energy and water. However, the proportion of customers on such schemes is still extremely low (<1% of essential bills accounts, highest penetration in water and the lowest in telecommunications).

To read more about whether the insights indicate increased financial stress levels, what support/intervention the Regulators have made and can we see any effect and what can suppliers do to help identify and support customers in difficulty - please continue to read here https://www.experian.co.uk/blogs/latest-thinking/automated-credit-decisions/how-are-customers-keeping-up-with-essential-bills-during-the-cost-of-living-squeeze/