The drop in wholesale power prices has meant that the Default Tariff Price Cap is now projected to fall below the Energy Price Guarantee (EPG) from July (Q3 2022).
Energy analytics company Cornwall Insight now expects energy bills to settle around £2,800 for the second half of 2023, placing them £200 below the EPG rate of £3,000 for an average household from April – although this will be above the current rate of £2,500.
Should the price cap fall to the predicted level, the EPG – wherein the government subsidises costs over the set rate to help ease the strain of soaring bills on households – will effectively stop costing the government in the second half of 2023.
The EPG is still expected to cost the government £37 billion for the period to 31 March 2024 however, which will ultimately need to be recovered from the taxpayer.
Even if current wholesale prices are maintained and the price cap falls to £2,800 from Q3, there will likely still be pressure on the government to support households as this level remains extraordinarily high.
For example, the Default Tariff Price Cap for last winter was £1,277 and for the six months from last April it was £1,971.
“While it is positive to see a drop in the price cap forecast, household bills are set to remain high,” said Dr Craig Lowrey, principal consultant at Cornwall Insight.
“With the Energy Price Guarantee rising in April, the second half of the year will still see a typical household facing bills that are well above historic levels and facing costs that many can ill afford.”
The EPG was introduced initially in September by then-prime minister Liz Truss, and displaced the price cap in October, which was set to rise to £3,549. At its current level it limits the cost of energy for those on a standard variable tariff to 34.0p/kWh for electricity and 10.3p/kWh for gas.
In his Autumn Statement, chancellor Jeremy Hunt announced that instead of running at this level for two years, it would instead rise to a £3,000 cap for an average household from April. The government expects the EPG to save the average household around £900 this winter, as well as £500 in 2023/24 at its increased rate.
QUARTERLY |
Q2 2023 (Apr – Jun) Forecast |
Q3 2023 (Jul-Sept) Forecast |
Q4 2023 (Oct – Dec) Forecast |
Electricity |
£1,725.51 |
£1,243.91 |
£1,308.02 |
Gas |
£1,819.80 |
£1,556.26 |
£1,527.14 |
TOTAL |
£3,545.31 |
£2,800.16 |
£2,835.16 |
Table: Cornwall Insight analysis.
“The cap’s fall below the threshold of the EPG will, if wholesale prices continue at this level, effectively see the scheme no longer costing the government,” continued Dr Lowrey.
“We must remain cautious as the government has essentially been underwriting a volatile wholesale energy market – one which is likely to remain unstable throughout the year. Even if energy prices continue at current levels – which is a big if – the costs to the government over the full period of the EPG are still contributing to government borrowing and will ultimately fall at the feet of consumers in the form of higher taxes.”
Cornwall Insight’s prediction of a drop in the price cap is driven by the recent fall in wholesale power prices given the mild weather and subsequent low demand, strong wind generation, and increased interconnector potential as France’s nuclear fleet comes back online, will be welcomed. But given supplier hedging, falling spot prices will have a limited impact in the short term.
The price cap for the first three months of 2023 is set at £4,279, with Ofgem set to announce its Q2 cap in the coming months. Cornwall Insight predicted that it will be set at £4,174 in December, increasing its previous predictions due to the volatility in the market during the snap of cold weather seen during the month.
This highlights the insecurity within the sector still, with numerous factors that could hamper the predicted drop in the price cap level beyond Q2.
“The government have indicated a desire to see reform in the energy market, including a review of domestic energy prices,” finished Dr Lowrey.
“It is clear that blanket measures of bill support are not providing adequate protection for the most vulnerable and more targeted measures including social tariffs may be something for the government to consider. While the details of future support are best left up to the judgement of politicians, the forecasts demonstrate we must look beyond the current policy if we are to see a fairer, more cost-efficient and enduring way of reducing household energy bills for those who need it the most.”