Predicted fall in the April 2023 Price Cap but prices remain significantly above the EPG  

Our latest Default Tariff Cap (price cap) forecasts for April – June 2023 (Q223) have dropped by over £600 since the last widely released figures on 17 October1. The average consumer is now predicted to pay £3,702 from April, when the Energy Price Guarantee (EPG) comes to an end. Forecasts for the latter two quarters of 2023 have also shown significant falls, as drops in the wholesale market filter through to consumer bills. Despite the falls wholesale prices remain well above historic levels.

Figures for Q123 (January – March 2023) remain high. Although wholesale prices have fallen sharply in recent weeks – particularly those for immediate term delivery – the nature of energy supplier hedging under the cap will mean that they have been largely unable to take advantage of this drop in the wholesale market.

While domestic consumers will be shielded from the increase by the Energy Price Guarantee (EPG), the rise in prices will see higher costs for the government as they make up the difference with suppliers. Our forecast per unit rate for Q123 for electricity, for example, is 66.76 p/kWh which compares with 34.00 p/kWh under the EPG, while the figures for gas are 17.05 p/kWh and 10.30 p/kWh respectively.

Despite the fall in the price cap from April 2023, the prices remain significantly above the £2,500 EPG levels, which will likely prompt calls for greater government intervention

Figure 1: Cornwall Insight’s default tariff cap forecasts

QUARTERLYQ123 CI ForecastQ223 CI ForecastQ323 CI ForecastQ423 CI Forecast
Electricity£2,105.42£1,836.23£1,438.48£1,483.88
Gas£2,149.88£1,866.00£1,719.19£1,698.25
TOTAL£4,255.29£3,702.23£3,157.67£3,182.13

Source: Cornwall Insight

The Price Cap is not a maximum limit on consumer energy bills, but rather a cap on how much suppliers can charge per kWh of energy used and a maximum daily standing charge. For the first time since August, we are also releasing our electricity and gas forecasts figures for the unit rate (p/kWh) and standing charge (£/day), with these figures reflecting Ofgem’s underlying methodology for the Price Cap along with our own analysis.

Figure 2: Default Tariff Price cap forecasts, Per Unit Cost and Standing Charge including VAT (dual fuel, direct debit customer, national average figures)

ElectricityQ123 ForecastQ223 ForecastQ323 ForecastQ423 Forecast
Standing Charge (£/day)0.460.370.370.37
Per Unit Costs (p/kWh)66.7658.6944.9746.54
GasQ123 ForecastQ223 ForecastQ323 ForecastQ423 Forecast
Standing Charge (£/day)0.280.310.310.30
Per Unit Costs (p/kWh)17.0514.6213.4013.23

Many will question why, when there have been significant declines in the wholesale market since record highs were reached in late August, these are not reflected in the January – March 2023 levels. However, the structure of the cap methodology is such that suppliers are implicitly encouraged to purchase the demand requirements of their customer base in advance through hedging on the forward market, meaning that suppliers will typically not have been able to take advantage of the full extent of the declines seen over the last couple of months.

As such, even though wholesale prices on the prompt market have fallen considerably in recent weeks – as have those for periods in 2023 and beyond – this is not reflected in the cap forecasts for Q123.

Our forecasts for Q223 onwards however do illustrate the fall in the wholesale market, with these having dropped by around a quarter since the highs seen in August 2022. Despite these losses, the cap forecasts remain well above the annual sum of £2,500 per household under the EPG. With the enduring nature of support for household energy bills up for review in early 2023, the potential for volatility in energy bills will need to be addressed as part of any ongoing measures established.

Reference:

  1. Cornwall Insight’s April-June 2023 figures released on 17 October predicted the price cap to be £4,347.69

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