The Energy Price Guarantee: What does it mean for us?

 

The Ofgem Price Cap is being replaced by the government’s Energy Price Guarantee. What will be the impact on prices – and what can we do to help secure affordable energy in the long term? Dr Mark Earthey, local resident and director of energy market analysts Matrica, takes a look.

On 8 September, Liz Truss announced her government’s intention to intervene against runaway prices in the UK energy markets, including introducing a new ‘Energy Price Guarantee’ to replace the Ofgem Price Cap. What will it mean for domestic and business consumers? In the absence of detail, we discuss what domestic and business energy consumers should do now.

 

A recap on the Price Cap

But first, a re-cap on the Cap itself. Back in May in TTL News, we examined the factors driving the price of electricity in an attempt to forecast the Ofgem Price Cap for October 2022. We arrived at £2,395, itself a significant rise on the April price of £1,971. We noted that Ofgem calculates its price cap on the basis of:

• Wholesale energy market costs, or the price of the energy required to produce the electricity, set by global energy markets;
• Non-energy costs, or the price of delivery through the network, plus operating costs, green levies, VAT, profit margin, and a host of others.

 

We concluded that wholesale energy prices would have to rise a long way to lift the October Price Cap much above £2,400. Unfortunately, rise they did, and rise by a very, very long way. By late August, Ofgem announced that their October Price Cap would rise to £3,549:

 

 

Looking at Ofgem’s chart above, it can be seen that the biggest driver of the Price Cap was the cost of wholesale energy : non-energy costs, including the much maligned green levies, had barely moved.

Also in May, we reported that Ofgem had decided to increase the frequency of its calculations to three-monthly from six-monthly, meaning we would have four new price caps per year from 2023. Ofgem’s intention was noble enough – when wholesale energy prices started to return to normal, a three-month Cap Price would follow the fall much more rapidly than the six-month, and pass the savings on to energy consumers more quickly. Except wholesale energy prices didn’t fall – they kept on rising steeply into 2023, dragging the Price Cap up with them. In late-summer, leading industry analysts such as Cornwall Insights and Matrica were forecasting some truly terrifying prices for 2023:

• Q1 2023 £5,387
• Q2 2023 £6,616
• Q3 2023 £5,897
• Q4 2023 £5,887

 

It became clear to all and sundry that these numbers were unaffordable by the vast majority of domestic and business energy consumers. Without government intervention, tens of millions would be plunged into energy poverty. The situation was worse for businesses, as they had no Price Cap to protect them, so were exposed to the full and unforgiving wrath of the international energy markets.

Enter Liz Truss and her Energy Price Guarantee (EPG). Had the sheriff arrived to round-up the bad guys? In a word, no, but that rather depends upon your perspective.

 

Impact of the new guarantee

The EPG sets the maximum average price to domestic consumers to £2,500 per year from October 2022 to September 2024 (two years), replacing the Ofgem Price Cap on a like-for-like basis, and saving typical households at least £1,000 per year. Businesses were promised similar help for the next six months, ahead of a review of vulnerable sectors starting in three months’ time, but for many businesses, that help will prove far too late. The EPG did nothing for consumers who couldn’t pay at the already elevated level of the April Cap Price, but at least they kept the £400+ support promised by the then-chancellor Rishi Sunak, reducing the average price paid to more like £2,100 – see graph below.

It’s also very important to note that the Energy Price Guarantee doesn’t limit the total amount you’ll spend on energy. You will still pay for the gas and electricity that you use but the government’s Energy Price Guarantee will limit the price that suppliers can charge for each unit of energy. The more energy you use the more you’ll spend.

Who pays?
Unfortunately, the EPG itself does nothing to repair the underlying structural flaw in UK energy policy, namely its acute vulnerability to rises in global energy prices. In the short term, Liz Truss is using government money – our money – to reduce Ofgem’s Cap Price from whatever level results from Ofgem’s latest calculations down to £2,500. This will cost the taxpayer around £120 billion or more over two years. It will be added to the national debt, and will have to be paid by somebody, including our grandchildren. Far from rounding-up the bad guys, Sheriff Truss and Deputy Kwarteng have paid them off using the town’s money.

Truss’s EPG also tinkers with some variables in Ofgem’s calculation, most notably the Green Levies, which will be suspended for the time being. The financial impact of this suspension will be negligible on the consumer, but will be far from negligible on the green projects aiming to free us from reliance on fossil fuels.

 

What’s the long-term plan?

On the plus side, Truss is taking positive steps to introduce energy supply-side reforms to make sure that this situation ‘never happens again’, and that the UK becomes self-sufficient in energy as soon as possible. The long-term aim is for the UK to become a net energy exporter. However, this initiative is somewhat hobbled by Truss’ political imperative to appease the right wing of the Conservative Party: suspension of green levies, no increase in onshore wind generation, no more windfall taxes, no centralized insulation-fitting programme, an increase in fossil-fuel extraction, more nuclear… the list of concessions goes on.

An obvious short-term solution involving a government decree that oil and gas extracted from UK fields must be sold to the UK Government on a cost-plus basis and not at global market prices is anathema to free-market evangelists like Kwasi Kwarteng. So, for the time being, there will be no more windfall taxes, no centralized government procurement in the public interest, and energy-producing companies with low costs of production will remain free to take advantage of high global prices. This is not their fault, merely the result of the free market – if the global market price for what you make is way above your local production costs, enjoy the ride while your government is incapable of intervening on the grounds of its ideology.

 

So, what can we all do to safeguard our energy?

So, what should domestic and business energy consumers do now? The answer is much the same as it was before Sheriff Truss rode into town – understand and reduce energy consumption wherever you can, and support self-sufficiency. Remember that the EPG itself solves nothing, but merely passes the bill on to the next three generations of taxpayers. Truss’ supply-side reforms will take years to come to fruition, but reducing energy consumption and boosting energy efficiency is something that can be done now by everybody.

In the short-term, we advise energy consumers to take the EPG money, but over the medium and longer terms, consider the following:

• Develop an improved understanding of their energy consumption behaviour via smart meters and apps;
• Fit insulation wherever possible, joining the many local community groups that are starting up to increase buying power, and fill the vacuum left by government lethargy;
• Reduce thermostat settings where possible (without threatening the health of the vulnerable);
  Move to more energy-efficient devices, for example, from fan ovens to air-fryers, from filament bulbs to LED, from gas boilers to electric heat-pumps;
• Move consumption to cheaper times of the day if their tariff allows this;
• Investigate installing solar panels, wind micro-turbines, and battery storage;
• Investigate joining community energy schemes – local generation for local people;
• Understand their consumer rights, and entitlements to financial support, using resources such as Citizens’ Advice Bureau;
• Lobby local and national politicians to make sure that Truss’ self-sufficiency drive focuses on climate-friendly, locally-based renewables and storage solutions, and not on fossil-fuel-based sops to right-wingers;
• Ensure that vulnerable businesses participate in the energy review starting towards the end of 2022. Do discuss or check with your local Chamber of Commerce, IoD, Federation for Small Businesses, and Trade Associations for announcements, as well as the business services arms of local government.
• Some consumer protest groups are advocating cancelling direct debits and not paying energy bills. We recommend that you DO NOT do this, tempting as it may be. The reason is that if enough people do not pay and their supplier goes bust, customers will be moved to a new supplier, and the extra costs passed on to consumers through higher bills. There is no escape from a system designed to protect itself against supplier failure! Also, refusing to pay may torpedo your credit rating, affecting your ability to get a mortgage and more.

 

Lower consumption, local generation

In conclusion, energy prices in 2023 and 2024 will be a lot lower than feared back in August, but still higher than the summer 2022 Price Cap. Businesses will get some relief, but will need to fight hard to keep it. Truss’ interventions will do little in the short-term to tackle the deeply-flawed UK energy market.

Do whatever you can NOW to reduce consumption and boost climate-friendly, local energy generation – together, we shall prevail over half-baked strategies based upon political expediencies.