UK Government set to shell out more for energy scheme as Ofgem confirms price cap increase

The energy regulator confirmed this week that it will increase the price cap for domestic energy users for the first quarter of next year, to 67p per kWh of electricity and 17p per kWh for gas. This is on top of increases already implemented this year, of 54% in April and a further 80% in October.

This latest increase, taking effect on 1 January, would see a typical annual bill for a dual-fuel household rising to £4,279.

However, the Government has reiterated that households will be protected from the increase for the first quarter of 2023. Under Liz Truss, the Government implemented an Energy Price Guarantee, limiting the amount that energy companies can charge homes for their bills. Energy companies are paid the difference from Government coffers to prevent them from failing.

The Energy Price Guarantee came into effect at the start of October and should keep the average annual household bill at around £2,500. It will be in place in its current form until 1 April 2023, when it will rise to £3,000. It will then remain in place until at least April 2024 due to measures announced by Chancellor Jeremy Hunt at last week’s Autumn Statement.

While customers will not be picking up the bill for the January price cap increase immediately, it does mean that the Government’s plans to subsidise energy companies will get more expensive. Taxpayers will, over time, have to foot at least some of the bill.

Cornwall Insight’s principal consultant Craig Lowery summarised: “The Energy Price Guarantee (EPG) will shield consumers from the January price cap of £4,279 announced by Ofgem today, however, the rise will be concerning to the Government, who will be shouldering the billions of pounds needed to compensate suppliers the difference.

“While the January price cap was locked in last week, the rise in wholesale market prices has led to an increase in our price cap predictions from April 2023 onwards. With these increases passed on to the government through payments associated with the EPG, in just one week our estimate of the full cost of 18 months of the EPG has jumped from approximately £38bn to £42bn. This is even allowing for the increase in the EPG from £2,500/year equivalent to £3,000/year equivalent.

“This highlights the nature of the wholesale market risk that the government is taking on by deciding to extend the EPG for longer than the March 2023 date announced by the Chancellor in October, with the consequence that the full costs may be potentially higher than currently budgeted for. Extending the EPG, even at an elevated level, has resulted in the Government being exposed to variables and factors over which they crucially have no control. The risk is reduced by changing the level of support but remains acute.”

Lowery added:  “With so many households struggling to pay their bills, it is essential that support is made available, however, it is clear that the EPG is not a desirable long-term solution. The review into domestic energy prices which has been signalled by the government will hopefully be the catalyst for a strategy to implement a long-term support solution. With Cornwall Insight predicting energy prices will remain above historic levels for many years to come, one thing is clear, more targeted support for the most vulnerable is likely to be needed on an enduring basis if the government wants to protect consumers while also stabilising its finances.”

Payments, but little resilience?

The Government’s current Energy Bills Support Scheme is providing all homes with a £400 grant, paid in six installments this winter. On top of this, councils are offering a £150 rebate for all homes in bands A to D, or bands A to E for disabled people, with the intention that people will put this saved money towards energy bills.

There are additional targeted payments for pensioners, those with disabilities and those on means-tested benefits.

At the Autumn Statement, Hunt was facing calls to bring forward a new national scheme for energy efficiency improvements to buildings to replace the failed Green Homes Grant. Calls came from citizen groups, environmental organisations and the Government’s own climate advisors.

Hunt said: “Over the long-term, there’s only one way to stop ourselves being at the mercy of international gas prices – energy independence combined with energy efficiency.”

A new ambition was set for the UK’s buildings and industry to reduce energy consumption by 15% against current levels by 2030. However, new funding will not be provided for energy efficiency until 2025, Hunt confirmed. The Treasury is in the process of creating an Energy Efficiency Taskforce to oversee the design and allocation of future funding schemes that should total £6bn between 2025 and 2030. An information campaign may well be confirmed in the nearer term.