The Default Tariff Price Cap has been set at £4,279 for the first three months of 2023, Ofgem has announced.
Bill-payers will be protected from the increase by the Energy Price Guarantee (EPG), which has capped a standard variable tariff at 34.0p/kWh for electricity and 10.3p/kWh for gas, inclusive of VAT, from 1 October till 31 March 2023.
“The Energy Price Guarantee is protecting consumers from soaring energy costs, meaning people’s bills will not rise in line with today’s Ofgem energy price cap increase,” a BEIS spokesperson said today (24 November).
“A typical household in Great Britain will save around £900 this winter thanks to Government’s intervention to limit how much suppliers can charge per unit of energy, easing the burden on household incomes.
“This comes on top of a £400 discount for all households on their energy bills this winter, and last week we confirmed the Energy Price Guarantee will continue to protect the public for another 12 months from April.”
Ofgem is still legally obliged to set a price cap for each quarter, which is made up of what it deems to be a fair maximum suppliers could charge their customers based on power prices.
For the first three months of 2023, customers paying via direct debit would be changed 67p per kWh for electricity and a standing charge of 46p per day. Meanwhile gas customers would be charged 17p per kWh with a standing charge of 28p per day, if the EPG wasn’t in force.
The increase in the cap will likely be of concern to the government, which is shouldering the cost of the support scheme, according to Craig Lowrey, principal consultant at Cornwall Insight said.
“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,” continued Lowrey.
“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.”
Ahead of the EPG being introduced, Ofgem had set the price cap at £3,549 for the Q4 2022 period. This was a dramatic increase from the £1,971 level set in April, which itself was 54% higher than last year’s winter cap of £1,277.
The ongoing energy crisis, driven by high gas prices due to a number of factors but spurred by the Russian invasion of Ukraine, is expected to keep power prices high throughout the next year and beyond.
Along with the announcement of the price cap, the Department of Business, Energy and Industrial Strategy (BEIS) today (24 November) wrote to Ofgem highlighting a number of changes to the cap introduced as part of the Energy Prices Act 2022.
For example, it updated the regulator’s duties to include an obligation to take account of the impact on public spending when considering modifications to the cap conditions, given the Exchequer will bare some of the cost of the cap due to the EPG.
“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,” said Lowery.
“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.
“The earlier this work begins the more easily some of the complexities in designing a more focussed scheme can begin to be addressed. One thing is clear, I think everyone accepts that it is not tenable to go on dealing with this situation in six month blocks of emergency measures.”