After much speculation, new Prime Minister Liz Truss has announced the government’s plans to handle the ongoing energy price crisis. This highly anticipated statement comes a few weeks after the Ofgem price cap rose to an eyewatering £3,549 a year.
The earlier assistance package proposed by then-Chancellor Rishi Sunak in February was based on projections of the price cap increasing from £1,971 in April to £2,800 in October. Since then, Ofgem has decided to review the price cap every three months instead of every six months.
The regulator’s current price cap of £3,549 for the October–December 2022 period is an increase of 80% on the current level, but projections for the next three-month period’s price cap suggest an even more shocking increase to £6,500 a year in the first quarter of 2023.
To support the British public and businesses with soaring energy bills this winter, the government is taking action to provide financial support and tackle the underlying issues with the UK energy market. This blog explains what you need to know about the new energy price cap.
What is the government doing about rising energy prices?
The Prime Minister revealed that the government will introduce an Energy Price Guarantee (EPG) that will take effect from 1st October 2022
and stay in place for the next 2 years. Like the Ofgem price cap, it is a limit on standing and unit charges, not a total bill cap.
This means that you’ll still pay for as much energy as you use, but the price per unit will stay at a fixed rate under the EPG. Even if energy prices continue to fluctuate for suppliers, the government will be taking on the excess costs rather than passing them on to domestic consumers.
Based on average household energy consumption, this will limit average domestic energy bills to a maximum of £2,500 a year. However, Ofgem’s three-monthly price cap reviews are still important, as they’ll determine how much the EPG scheme will cost the government (and taxpayers).
In addition to the EPG, the previously announced Energy Bills Support Scheme (EBSS) is still going ahead. All households in Great Britain with a domestic electricity connection will receive £400
in non-repayable credit to help with winter energy bills.
These will be split into monthly automatic payments over the next six months (£66 in October and November, then £67 for the following months until March). This means that the prospective average bill for October 2022 to October 2023 will actually be £2,100.
Other previously announced assistive measures remain in place, but green levies have been temporarily suspended as part of the new EPG scheme. The plan applies to all domestic households in England, Scotland, and Wales, with ‘the same level of support’ proposed for Northern Ireland.
Anyone who doesn’t use mains energy (such as heating oil instead of gas or electricity) will also receive help in the form of discretionary payments.
What is the Energy Price Guarantee?
The government’s Energy Price Guarantee scheme is taking the sting out of the Ofgem price cap, reducing the average bill projection by around £1,000 a year. However, it’s important to bear in mind that the EPG doesn’t put a cap on total annual energy bills – it only limits how much your energy supplier can make you pay per unit and per standing charge.
Your exact bill will depend on how much energy your household uses, just as it did before the EPG. The number of people in your home and their living habits will affect this – so it’s still a good idea to make conscious efforts to reduce your energy consumption this winter.
You won’t need to apply for the EPG scheme, as it will be automatically enforced. Your energy company should calculate how the new measures will affect your specific energy prices and contact you before 1st October 2022 with more information.
Since the projection of £2,500 annual bills is for an ‘average’ household, and not everyone uses the same amount of energy, it’s likely that many people will actually pay less. All households will also receive the £400 from the EBSS, in the following ways:
- Smart pre-payment meter – credited directly to the meter in the first week of the month.
- Traditional pre-payment meter – credited when you top up at your regular top-up vendor or sent as vouchers to redeem when you top up.
- Standard variable tariff – credited directly to your account in the first week of the month.
- Fixed tariff – energy suppliers should adjust fixed tariffs.
- Direct Debit – either a reduction to your monthly debit or a refund to your bank account.
If you pay ‘inclusive’ rent, your landlord must comply with maximum resale pricing rules (set at the same price as they originally paid for the energy).
What about support for business energy bills?
While most non-domestic energy customers in the UK have fixed tariffs, many don’t – which makes things even more difficult for the government. With lots of businesses due to renew their fixed price energy deals in October, and no Ofgem price cap or EBSS payment to protect or support them, lots of businesses are likely to go under when they can no longer afford their utility bills.
To help commercial businesses and public sector organisations (like charities, hospitals, and schools), the government is planning to provide a similar six-month scheme to the Energy Price Guarantee for non-domestic energy users. This ‘equivalent guarantee’ should cap tariffs at the same price per unit, but will only last for six months, compared to the two-year EPG.
After this initial period, the government intends to provide further support to vulnerable sectors, such as hospitality, following a review within the next three months. This review should identify where the government needs to focus their non-domestic energy bill support.
We can expect further details of this business support scheme to be published in due course.
Will the government regulate the energy sector?
There are long-term problems with the UK energy sector that are contributing to the underlying causes of soaring energy costs. The government is therefore looking closely at the ways Ofgem operates as an industry regulator and reviewing what needs to be changed.
This includes launching an Energy Supply Taskforce to negotiate long-term contracts with both domestic and international energy suppliers to reduce prices, and an Energy Markets Financing Scheme to address liquidity requirements for UK energy firms.
Other actions include launching new oil and gas licences, lifting the moratorium on shale gas production (fracking), and accelerating the sourcing of new energy supplies (including North Sea oil and gas, and renewables like wind and solar power).
The government is also looking into nuclear energy projects, and reviewing current targets for net zero emissions by 2050. Prime Minister Liz Truss has further ambitions to make the UK an energy exporter by 2040, alongside fundamental energy market reforms.
Where to get financial help with paying energy bills
It’s a bit of a waiting game for domestic energy users and businesses alike, as everyone needs to wait for their energy supplier to contact them about their bills changing in October. Each user’s bill will be different, depending on their tariff type and location.
If you find yourself unable to keep up with energy bill payments, you should contact your supplier. They must offer you a payment plan that you can ‘reasonably afford’ in line with Ofgem rules, or provide emergency credit if you can’t top up your meter.
Anyone struggling with serious energy bill debt should look into applying for an Energy Fund grant that could help you to get back on track with repayments.
In addition to the EBSS payment, other vulnerable people may also receive further payments from the government to help with energy bills and other living costs. These include:
- Cost of Living Payment (£650) – for claimants of means-tested benefits
- Pensioner Cost of Living Payment (£300) – paid alongside the Winter Fuel Payment
- Disability Cost of Living Payment (£150)
– for claimants of disability benefits
You could also contact your local council to enquire about the Household Support Fund., or visit the Help for Households campaign website for more options.
Announcements about the funding methods for these measures are expected in the week beginning 19th September, but are likely to be delayed due to the passing of Her Majesty Queen Elizabeth II.
If you find yourself in need of fiscal management advice and are able to hire a consultant within your budget, please contact GBAC – our team of talented accountants will be happy to assist you.