Lowering bills, cutting carbon
01 Mar 2023
The news over the last two years has been dominated by stories of skyrocketing energy prices. Global competition for gas and the war in Ukraine have contributed to record spikes in the wholesale cost of energy – the price energy companies pay for the power they then sell to homes and businesses. But recently, that’s changed. Wholesale prices have fallen dramatically since their peaks in summer 2022. And yet, from 1 April, the monthly bill for a typical UK home is set to increase by £75. That’s causing many people to ask, “If energy prices are going down, why are my bills going up?”
To understand why bills are going up, you first need to understand the price protections that have been introduced by government to protect consumers. There are three:
Introduced in 2019, the price cap limits the unit rates that suppliers can charge customers on ‘standard’ tariffs. These are the tariffs that you end up with if you don’t choose an alternative ‘fixed rate’ tariff. Most homes in the UK are currently on standard tariffs.
The price cap is designed to stop companies making ‘excess’ profits and in normal market conditions, it still allows suppliers to make money from offering tariffs that are cheaper than the cap.
It’s set quarterly, based on wholesale energy prices in the previous months. That means that if prices were rising last quarter but are falling this quarter, the price cap still goes up.
Because the price cap tracks wholesale prices, if those prices go through the roof, so eventually will the price cap. By autumn 2022, the price cap was heading to eye-watering levels, so government stepped in and introduced something called the Energy Price Guarantee (EPG). The EPG applies a discount to the price cap to keep the bill for a typical home at a lower level – initially £2,500 a year.
In addition to the limits imposed by the EPG, the government is also providing every household with a £400 grant, applied through people’s energy bills over the six months from 1 October 2022 to 31 March 2023.
Two things are happening in April 2023 that combined are going to result in a big increase in household bills. The first is that, in an effort to reduce the amount of taxpayers’ money required to pay for the Energy Price Guarantee, the discount it offers is being reduced. This means that, for a typical home, the EPG will only discount the price cap unit rates to the equivalent of £3,000 a year, rather than the £2,500 a year that applied from 1 October 2022 to 31 March 2023.
On top of this, the monthly payments for the £400 Energy Bills Support Scheme grant are due to come to an end. The combined effect of this will be equivalent to a £900 annual increase for a typical home. Given that current energy prices have already pushed an estimated 7.4 million homes into fuel poverty, these additional rises are likely to have a crippling impact on households across the country.
One of the reasons that the April increase is going to be so big is that falling wholesale prices have not yet fed through into the price cap. If they had, and the price cap had fallen to below the level of the £3,000/yr limit set by the Energy Price Guarantee, then the price cap would take precedence, keeping bills at a lower level. But, because the price cap is based on historic wholesale prices, the peaks of late 2022 are still reflected in its April level – £3,280 for a typical home.
The good(ish) news is that the current lower wholesale prices will be reflected in the price cap for the following quarter, from 1 July 2023. As the chart below shows, current forecasts are for the price cap to fall to somewhere around £2,150 a year for a typical home, and remain around that level through the rest of the year.
Here are our key take aways from all that:
And don’t forget…
Big Clean Switch works with employers to provide up-to-date, comprehensive guidance and equipment to their staff to help them permanently lower their energy bills and cut carbon. If you’re an employer and want to make our guidance available to your people, drop us a line.