Electricity units set at 34.0p/kWh: Energy Price Guarantee details released by government

Following the official announcement of the energy bills freeze over the coming winter by Prime Minister Liz Truss on Thursday 8 September, the government has released the first details of how exactly it will work.

From 1 October 2022, the Default Tariff Price Cap will be frozen at £2,500 for the next two years as part of the Energy Price Guarantee, instead of rising to £3,549, as previously announced by Ofgem. This is expected to save the average household £1,000 and the average flat £700 a year, according to the government, with additional support also announced for businesses.

The government has now unveiled further details of how the scheme will be rolled out and the unit prices customers face, although many key points are yet to be expanded.

Domestic energy bills: unit price set at 34.0p/kWh for electricity

The Energy Price Guarantee will be automatically provided to households in England, Scotland and Wales by there energy supplier.

Support will also be provided to households in Northern Ireland, which the government is currently working with NI Utility Regulator and NI energy suppliers amongst other to ensure the same amount of support is delivered to households in the nation as in the rest of the UK.

For those on a standard variable tariff, direct debit bills will be limited to 34.0p/kWh for electricity and 10.3p/kWh for gas, inclusive of VAT, 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.

Households on pre-payment meters will see the Energy Price Guarantee applied to the rate of each unit of energy. There will continue to be a difference between the cost for pre-payment meter customers and other bill payers, as there is under the regular price cap, the government confirmed.

Those that are not on standard gas or electricity contracts – such as those living in park homes or on heat networks, therefore falling outside of the Energy Price Guarantee scheme – will receive comparable support through a discretionary fund, according to the government.

Standing charges will remain in line with the levels set out by Ofgem for the Default Tariff Cap, at 46p per day for electricity and 28p per day for gas for a typical dual fuel customer paying by direct debit.

According to the government, the new Energy Price Guarantee scheme will see households and flats save:

Of the expected £1,000 saving, £150 will come from temporarily suspending green levies. These will be transferred to the Exchequer in the meantime, so that customers don’t bear the costs but benefit from the low-carbon electricity generation they support.

The green levies – which account for around 9-12% of electricity bills – make up a number of schemes, including the Contracts for Difference (CfD) scheme, which is expected to pay back £1.3 billion in the 18 months from Q4 2021.

As well as the Energy Price Guarantee, the £400 Energy Bills Support Scheme will still be rolled out from October. Suppliers will automatically distribute the support in instalments over a six month period.

Other support includes £1,200 for the most vulnerable households, paid in instalments over the year, according to the government.

Business energy bills: details of welcomes support yet to be unveiled

Along with the support for households, Truss also announced support for non-domestic customers as part of her first speech to the House of Commons as Prime Minister.

With many businesses facing bills ten times higher than last year, concern has been growing over the number of closures such cost increases would cause.

Now, businesses will see their energy costs fixed at the same price per kWh as households for six months. After which, continued support will be offered to vulnerable industries.

There will be a review in three months to consider how to target further support to ensure it is going to those most in need, according to the government.

Little additional detail has yet been announced on this support, with more information expected “shortly”.

Long term measures: Industry welcomes new CfD scheme but details needed

The energy sector is still waiting to hear the details of support announced for the development of long term energy security by Truss in her speech to the House of Commons.

Truss announced there would be a new oil and gas licensing round as early as next week, which could see 100 licenses up for grabs. She also ended the moratorium on the development of UK shale gas production through fracking.

This, according to the government, could see gas flowing in as soon as six months in areas where there is local support. Recent government polling found just 17% of the public support fracking – dramatically lower than technologies like solar, which is popular with over 80% of the public.

Additionally, given the gas energy crisis is being driven by the high cost of gas, increasing production both from the North Sea and from fracking will have little impact on the cost of energy.

This point was highlighted by Kwasi Kwarteng – now Chancellor and the man set to release a plan for how the new Energy Price Guarantee amongst other support measure will be funded later this month – in his role as business and energy sector earlier this year.

Support for new renewable and nuclear generation was also included within Truss’s speech, but with no detail beyond a commitment to “drive forward the acceleration” of clean energy.

For existing renewables and nuclear, the Prime Minister announced the introduction of a Contracts for Difference (CfD) scheme, which would help lower consumer bills by ensuring generators are paying back when prices are high – as they are expected to be throughout the winter and beyond – and give generators long term security around their revenues.

“Renewable and nuclear generators will move onto Contracts for Difference to end the situation where electricity prices are set by the marginal price of gas,” said Truss.

“This will mean generators are receiving a fair price, reflecting their cost of production, further bringing down the cost of this intervention.”

The move was originally suggested by the UK Energy Research Centre, as a voluntary scheme for assets operating under Renewable Obligations. Over recent weeks, the industry has thrown its weight behind the suggestion with trade associations Energy UK, RenewableUK and Solar Energy UK all backing it.

While the inclusion of a new CfD scheme has therefore been welcomed by the industry, there remain as yet no details released around exactly how or when it will be implemented. Its impact on energy bills remains to be seen therefore, as the devil will be in the detail.

Beyond renewables, Truss reconfirmed the country’s commitment to progressing up to 24GW of nuclear by 2050, a target previously unveiled in the British Energy Security Strategy earlier this year. The UK currently only has one new nuclear power plant under construction, Hinkley Point C in Somerset.

EDF is constructing the new asset, which will consist of two reactors with a total capacity of 3,260MWe when complete. It has been hit by numerous delays and cost increases however, with COVID-19 further straining the project.

All but one of the nation’s six nuclear power stations in operation are expected to close by 2030, as the aging fleet starts to retire.

Beyond generation, Truss also reiterated the plans to reform the structure and regulation of the energy market. This will include a review of the UK energy regulation, following on from the recent criticism of Ofgem – the regulator was branded “incompetent as the regulatory authority” by a report from the Department of Business, Energy and Industrial Strategy select committee earlier this year.

A second review will be launched that will look into meeting net zero by 2050 in an “economically-efficient way” given the altered economic landscape. This will be chaired by Chris Skidmore MP and a report will be produced by the end of the year.

The final aspect of Truss’s energy plan is the creation of an Energy Supply Taskforce, and an Energy Markets Financing Scheme. The taskforce will be led by Madelaine McTernan – who headed the Vaccine Taskforce – and has already begun negotiations with both domestic and international supplier to secure long term contracts designed to reduce the price they charge for energy and increase security of supply.

While the Energy Markets Financing Scheme will be a joint venture between HM Treasury and the Bank of England designed to address the “extraordinary liquidity requirements faced by energy firms operating in UK wholesale gas and electricity markets.”

In doing so, it will look to enable the stability of both energy and financial markets, as well as the reducing the eventual cost for businesses and customers. It will provide short term financial support and is expected to be used as a last resort.