The Energy Price Guarantee (EPG) will shield consumers from the January price cap of £4,279 announced by Ofgem on 24th November, however the rise will be concerning to the government, who will be shouldering the billions of pounds needed to compensate suppliers the difference.
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.
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.
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. 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.
Figure 1: Cornwall Insight’s Default tariff cap forecasts
Figure 2: Default Tariff Cap forecasts, Per Unit Cost and Standing Charge including VAT (dual fuel, direct debit customer, national average figures)