Despite key concerns, the changes to the Energy Price Guarantee could actually present a “golden opportunity” for government, according to the energy sector.
Yesterday (18 October) newly appointed Chancellor Jeremy Hunt announced that the support scheme would end in April 2023, as opposed to two full years from October 2022.
In a statement, the Chancellor brought forward a number of measures from 31 October’s Medium-Term Fiscal Plan, including the change to the timescale of the cap of domestic energy prices.
He said that when looking beyond April, the Prime Minister and the Chancellor agreed that it would be “irresponsible for the government to continue exposing the public finances to unlimited volatility in international gas prices.”
There will be a Treasury led review to establish how best to support households and businesses with energy bills after next April.
“The objective of the review is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need. The Chancellor also said in his statement that any support for businesses will be targeted to those most affected, and that the new approach will better incentivise energy efficiency,” a statement from the Treasure read.
While there is concern as to the impact this change will have on consumers – Cornwall Insight is predicting the price cap could sit at £4,348 p/a for April 2023 when the scheme finishes – there is hope that the review will lead to a more targeted support system.
“The Chancellor’s statement that he will be maintaining the EPG until April next year, with the government looking at more targeted measures thereafter, resonates with the views of Cornwall Insight. In very challenging political, market and economic circumstances, it is good to see the government recognise the volatility in prices the fiscal position may otherwise be exposed to if it did not take this course of action,” said Gareth Miller, CEO at Cornwall Insight.
“As Cornwall Insight have previously recommended, it was always important that the government use the cover of their bold intervention to review the universal nature of the domestic EPG and develop options for targeted schemes which mitigate the gamble being taken on gas prices, whilst critically still protecting those who need support, alongside increasing the focus on energy efficiency. We are glad that the government are now taking these actions.”
The Energy Price Guarantee caps the unit price of energy at 34.0p/kWh for electricity and 10.3p/kWh for gas, inclusive of VAT, for those on a standard variable tariff from 1 October.
Those on fixed tariffs at a higher rate than the new price freeze due to the recent energy price rises will see their unit prices reduced by 17p/kWh for electricity and 4.2p/kWh for gas from 1 October.
As such, the average household’s energy bills were set to be £2,500, saving them around £1,000 a year.
“Of course, if gas and power prices fall, it could be argued that keeping the EPG as it is currently would contain few risks,” continued Miller.
“However, on the logical assumption that suppliers bought ahead for this winter there are likely to be c.£30 billion of costs already locked in. Our latest forecasts for the Ofgem domestic default tariff suggest there would still be costs to the EPG scheme for 2023 even when we have seen some easing in the forward curve from market peaks in recent weeks. And should gas and power prices rise further into winter 23-24, without any change to approach, there would be exposure to heightened cost risks over which no UK Minister has real control. We can hope that they won’t, but in a febrile economic and market environment, hope is not a strategy and leaving uncovered downside risk would be very challenging indeed.”
Given the volatility in the market, there is still a lot of uncertainty about the impact of the Energy Price Guarantee and the changes announced by Hunt.
This uncertainty in itself provides one of the biggest concerns about the shortening of the support scheme.
“This is an almighty trade-off. In seeking the confidence of markets, the government has created huge uncertainty for households. Everyone knows why decisions have been made at breakneck speed, but there are questions that need to be answered, and answered quickly,” said National Energy Action chief executive Adam Scorer.
“Who will still get support? Will it include vulnerable households not on welfare benefits? Will that support be deeper for those in greatest need? What do they mean by incentivising energy efficiency?
“Households on the lowest incomes are already rationing their energy usage to dangerous levels. £2,500 is beyond their means. Many vulnerable people were holding on by their fingertips. Government has to be very, very careful it doesn’t prise them away.”
This need for certainty was reiterated by many in the sector, who emphasised the concern the sudden change has created.
“Brits are facing a bleak winter. Today’s energy price cap walk back will undoubtedly feel like a kicking when millions are already on their knees. But the Government now has a golden opportunity to lean into a change of course that invests in a real long-term plan to bring bills down permanently,” said Polly Billington, UK100 CEO.
“The pledge to cap ever-ballooning energy prices offered millions facing fuel poverty some reprieve. Without it, consumers could see average bills exceed £5,000 in 2023. And with no clarity on what follows when the support stops in April, people will be understandably panicked.”
“The Government can help quell the panic by investing in long-term solutions to the energy crisis that will reduce bills while accelerating Net Zero progress. The money saved by shrinking the energy price guarantee could turbo-boost a national energy efficiency drive.”
All eyes will be on the review, to establish if Hunt’s shortening of the support scheme will lead to something tailored and ultimately more effective.
“What we’re seeing is the fallout from a rushed implementation of an open-ended policy from a political party in disarray. This turnaround will cause yet more uncertainty for vulnerable household and business customers,” said Nigel Pocklington, CEO of Good Energy.
“We heard the words ‘incentivise energy efficiency’ — this should not be a euphemism for simply leaving customers at the mercy of market prices.
“What is needed now is certainty. Urgent clarity from the Treasury on what support customers can expect when, alongside a campaign to reduce energy demand. Not only through public information, or price incentives, but physical insulation of homes.”
The sector has been calling for greater support for energy efficiency in light of soaring gas prices.
“One of the reasons the energy crisis is hitting Brits so hard is that we’re paying the price of successive governments kicking the can down the road on making our homes fit for the future,” said Billington.
“The tens of billions saved from the energy price guarantee could be prudently invested in a drive to upgrade Britain’s draughty homes. And we know local authorities are best-placed to lead that drive.”
“The cheapest energy is the energy we don’t use. To avoid another winter like this one, we need a locally-led energy efficiency revolution to slash household bills long term. The more urgently it’s implemented, the better it can protect Brits from the misery of £5,000-a-year energy bills. It’s time to end the wait and insulate.”