Energy Price Caps
The UK Energy Crisis is still at the forefront of the country’s discourse, and the energy price cap is a huge part of this discussion. The energy price cap is due to fall from the 1st of April, however, it remains above the government’s Energy Price Guarantee. The government’s Energy Price Guarantee is due to rise from April 1st, which leaves households in a complicated situation.
The energy price cap
Ofgem determines the energy price cap depending on wholesale gas prices. Therefore, the cap is fluid and subject to change quarterly. In February 2022, Ofgem announced that the energy price cap would increase by £257, or 22%. The rise is from £1,138 to £1,395 per year for the average household on a default tariff. This was due to several factors. Factors include rising wholesale energy prices, higher network costs, and increased costs associated with government policies to support renewable energy. The increases continued throughout 2022, rising above £3,500 in Q4 2022.
From the 1st of April, the level of the cap will decrease to £3,280.
The increase in the energy price cap has been controversial. It means that millions of households in the UK will face higher energy bills. However, Ofgem has argued that the cap is necessary to ensure that energy suppliers can continue to operate and invest in new energy infrastructure. The cap also allows energy companies to protect consumers from paying excessive prices. The relationship between the price cap and price guarantee is complicated.
The chart below displays the huge increases in the price cap during 2022.
The Energy Price Guarantee
The Energy Price Guarantee was initially announced in October 2022 to combat the rising energy costs. The soaring price cap was due to impose an 80% price increase for UK households. The guarantee capped household bills at £2,500 irrespective of the energy price cap and wholesale prices.
Chancellor Jeremy Hunt initially indicated that there were no plans to extend the guarantee past March. However, with the price cap falling, the planned increase of the Energy Price Guarantee to £3,000 would have increased energy bills for households. Therefore, the guarantee is due to stay for 3 months (April-June) and be reviewed at the end of the period. Currently, the energy price cap is forecast to hover or dip below £2,500; ‘From the 1 July 2023 to 30 September 2023 the price cap prediction will see the bill down by 31 per cent falling £2,201/year on typical use.’ (Stephen Mcilkenny, The Scotsman)
The extension to the guarantee does present a U-turn from Mr Hunt to the benefit of millions.
“High energy bills are one of the biggest worries for families, which is why we’re maintaining the energy price guarantee at its current level.”
“With energy bills set to fall from July onwards, this temporary change will bridge the gap and ease the pressure on families, while also helping to lower inflation too.”
Whilst the price guarantee is staying put, the additional help is not expected to. Most households were also getting a £400 winter discount during the previous quarter, however, there is no indication of Mr Hunt extending this support package. With wholesale gas prices falling, the guarantee scheme will become cheaper for the UK Government. The Treasury predicts that the scheme will cost £4 billion. This is a third of the estimated cost calculated in the autumn.
EWI’s place in the UK Energy Crisis
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