Last update : 3 March 2023
Energy Bills set to fall in April even if the Energy Price Guarantee increases to £3,000
Is it possible that energy bills will actually go down even if the Energy Price Guarantee shoots up to £3,000 from 1 April 2023?
The growing campaign to keep The Energy Price Guarantee (EPG) at £2,500 a year, led by Martin Lewis, obviously thinks so. But is that true? We are not so sure.
In a letter to the Chancellor Jeremy Hunt, the rationale for not increasing the EPG is set out as follows.
- The planned Energy Price Guarantee increase “will increase energy bills yet again for almost every home across England, Scotland and Wales”
- Because “Government expenditure on the energy subsidy will be billions less than expected” meaning that it can be readily funded.
- Because “postponing the increase is a practical and fair decision” even though it is not targeted.
- “Without intervention, ….the number of fuel poor households will rise drastically”.
- “Crucially, the damage to people’s pockets and mental health of another round of energy price rise letters is disproportionate”.
Martin Lewis has subsequently said this planned increase seems to be “an act of national mental health harm” (At 2.05 in the clip).
Are all, or any, of those claims true? Let’s see.
In this article we try to answer the following questions.
- Will the EPG increase really increase almost everyone’s energy bills?
- How much will extending the Energy Price Guarantee at £2,500 cost?
- Even if affordable, does that still make it “practical and fair” or are there fairer ways to spend the money?
- Is it still “an act of national mental health harm” if energy bills fall rather than increase?
Let’s address these issues in turn.
Are energy bills really going up again?
There is no doubting that, with the Energy Price Guarantee set to increase from a notional annualised bill level of £2,500 up to £3,000 on 1 April 2023, it means that the price of gas and electricity units will increase by some 20%. (Maybe be a little more or less depending upon how standing charges are treated).
But does that mean that energy bills will also increase?
Actually, NO.
The energy bill is a sum of the daily standing charge + (unit price * volume).
The unit price may increase but, if volume falls faster, then the overall energy bill will also fall.
And that is exactly what will happen in the spring, and then again in the summer. Even taking into account the ending of the £400 Energy Bills Discount Scheme, quarterly household energy bills will fall over the next 6 months even with the higher £3,000 Energy Price Guarantee.
Why? Simply because, as a Northern hemisphere country, (and a poorly insulated one at that), we use a huge amount of energy in the winter (principally gas) for space heating, Demand for that gas collapses as temperatures rise in the spring and summer. It’s just the weather.
Let’s take a closer look at the numbers.
The table below shows Ofgem data for quarterly domestic gas demand. These demand figures are used in calculating the energy price cap.
| Quarter | Share of demand (standard (non-prepayment) gas meters) | Notional demand (for average domestic household) kWh | Change in demand (quarter-on-quarter) |
|---|---|---|---|
| Jan - Mar | 42.2% | 5,068 | |
| Apr - Jun | 16.8% | 2,018 | -60% |
| Jul - Sep | 7.7% | 923 | -54% |
| Oct - Dec | 33.2% | 3,990 | +332% |
| Source; Ofgem |
From the data you can see that gas demand drops by 60% in Q2 vs Q1. Unit charges would need to rise by 150% to offset this; far, far higher than the 20% increase planned.
Electricity demand is far less seasonal. Electricity has much lower use in space heating and therefore electricity demand does swing so much with changing temperatures.
Quarterly Energy Bill Forecasts 2023-2024
What does this look like in pictures?
Figure 1 below shows quarterly energy bills for the average domestic household through to the end of 2024. The data uses a combination of historic energy prices, current and projected Energy Price Guarantee rates and projected Energy Price Cap rates.
Figure 1 notes
Quarterly energy bills based on the following assumptions.
Average annual usage of 12,000 kWh for gas and 2,9000 kWh for electricity.
Seasonal profile of gas and electricity usage based on Ofgem quarterly indices as per Energy Price Cap calculations.
Current Cornwall Energy forecasts for the Energy Price Cap for Q3 2023 (£2,112) and Q4 2023 (£2,118).
There are 3 distinct periods in the graph.
- The period to 30 September 2022, when the energy price cap set energy bills
- From 1 October 2022 through to 30 June 2023 when the EPG sets energy bills
- The period from 1 July 2023 onwards when the Energy Price Cap will again fall below the EPG and becomes the price setting mechanism.
During the Energy Price Guarantee period, the graph shows quarterly energy bills both before (blue bars) and after (orange bars) the £400 Energy Bills Discount Scheme is taken into consideration.
Crucially, please note that we have used independent third-party data in this analysis (not our own forecasts) so as to avoid any potential bias.
Energy Bills are are NOT going up even if the Energy Price Guarantee does
What is the data showing us?
From the chart we can see that “energy bills yet again for almost every home across England, Scotland and Wales” are clearly NOT going up in Q2 or Q3, even with the Energy Price Guarantee being increased to £3,000. In fact, even when you take the £400 Energy Bills Discount Scheme refund into consideration, energy bills are still NOT going up.
In fact, the reverse is true. Almost every home will see their energy bills fall.
Quarterly energy bills will pick up again in Q4 2023 when gas demand picks up as winter temperatures drop. But at that point, the Energy Price Cap, and not the EPG, will be the price setting mechanism. So arguments about the current level of the EPG are then no longer relevant.
Who will benefit from falling energy bills? Pretty much everyone.
Monthly energy bills will vary depending on temperatures but, overall, quarterly bills in Q2 2023 will be lower than Q1 2023, despite rising unit prices. They will be lower again in Q3 2023.
Households with prepayment meters will see the effects almost immediately. Less energy used means meters will need to be topped up less frequently. So too for anyone paying monthly or quarterly based on their actual energy usage. But what about households paying by monthly direct debit?
When will energy direct debits start falling?
Direct Debit payments are set on a forward-looking basis. The energy supplier is supposed to take into consideration a customer’s expected energy usage and multiply that usage by the projected price of those units. For any given level of energy usage, we will see unit rates going up in Q2 as the Energy Price Guarantee is lifted. However, energy unit charges will then come crashing down in Q3 as the Energy Price Cap eventually catches up with the 80% collapse we’ve seen in wholesale gas and electricity prices since August 2022.
The figure below shows what those demand weighted projections look like on a 12-month forward looking basis. The graph uses the exact same data and assumptions as the first graph.
What the graph shows is that, the expectation of future energy bills has already peaked. It peaked back in October 2022, at just over £2,550. From that point onwards, falling energy prices from Q3 2023, are the dominant factor in the forward-looking calculation. The trend is downwards. Now that sharp falls in the Energy Price Cap are all but in the bag, this should feed into direct debit calculations. Energy suppliers should be using forecasts of lower forward energy costs to calculate today’s direct debit payments. Direct debit payments should be falling. At worst, not going up.
Households who pay their energy bills by direct debit should shortly start to see those direct debit payments starting to fall even as the EPG increases.
On the data, energy bills are not increasing, Quite the reverse. They are starting to fall.
With the fundamental rationale for the Externd the Energy Price Guarantee campaign shot to pieces, is there still a case for extending the Energy Price Guarantee at the £2,500 level? Let’s see.
How much will extending the Energy Price Guarantee cost?
The way the EPG works is like this. If the Energy Price Guarantee level is below the level of the Energy Price Cap, the EPG prevails and that is what households pay. If the Energy Price Cap falls back below the EPG, then the Energy Price Cap takes over as the price setting mechanism and the EPG becomes redundant.
Under the Energy Price Guarantee, government pays to energy suppliers the difference between the Energy Price Guarantee rates and what suppliers would charge to consumers had the guarantee not been in place (basically the Energy Price cap rates).
There is no question that the cost of this support scheme is materially lower now than the expected cost was when it was first introduced on 1 October 2022. At that point some alarmist forecasts were projecting £6,000 energy bills. Subsidising those costs down to £2,500 was expected to run into the £10’s of billions.
As the Energy Price Cap has fallen, gradually reflecting lower wholesale gas and electricity costs, so too has the cost of the subsidy. The cost will fall further still once the EPG is lifted to £3,000 as this will reduce the spread between the Cap and the Guarantee. Once the Cap falls below the guarantee, the subsidy cost disappears altogether.
Energy Price Guarantee cost breakdown by month
The table below shows a rough calculation of the historic, current and projected cost of the EPG subsidy by month.
| Month | Energy Price Cap (£) | Energy Price Guarantee (£) | Difference (£) | Demand share | Cost (£bn) | Extension Cost (£bn) |
|---|---|---|---|---|---|---|
| Oct 2022 | 3,549 | 2,500 | 1,049 | 8.2% | 2.3 | |
| Nov 2022 | 3,549 | 2,500 | 1,049 | 10.0% | 2.8 | |
| Dec 2022 | 3,549 | 2,500 | 1,049 | 11.8% | 3.3 | |
| Jan 2023 | 4,279 | 2,500 | 1,779 | 12.9% | 6.2 | |
| Feb 2023 | 4,279 | 2,500 | 1,779 | 11.0% | 5.3 | |
| Mar 2023 | 4,279 | 2,500 | 1,779 | 9.3% | 4.5 | |
| Apr 2023 | 3,280 | 3,000 | 280 | 6.8% | 0.5 | 1.4 (+0.9) |
| May 2023 | 3,280 | 3,000 | 280 | 6.7% | 0.5 | 1.4 (+0.9) |
| Jun 2023 | 3,280 | 3,000 | 280 | 6.7% | 0.5 | 1.4 (+0.9) |
| Total | 26.0 | 28.7 (+2.7) | ||||
| Source; energyscanner calculations |
A monthly cost of £2-3 billion in Q4 2022 exploded to over £5 billion a month in the current (Jan-Mar 2023) quarter. However, as the spread between the cap and the guarantee narrows from April 2023, then the cost falls dramatically. To just £500 million per month.
The final column of the table shows what the cost would be if the £2,500 Guarantee was extended for another 3 months; approximately £4.5 billion This is an extra £3 billion over and above current projected spend. That’s fairly small change compared to the money that this government has spent (blown?) recently, but it is still in the billions.
So yes, “Government expenditure on the energy subsidy will be billions less than expected”. However, just because it is (probably) affordable, does it mean that it is worth doing?
Is extending the Energy Price Guarantee practical and fair?
Practical?
Probably, but so too are lots of other schemes that already have tried and tested delivery methods.
It’s worth noting that there are around 27 million households in the UK and around 32 million income tax payers (around 1.2 income tax payers per household on average).
So, a taxpayer funded universal support payment, like the EPG, largely gives money back to the same people it took it from. There is some re-distribution in the process. But essentially it is taking money from one person’s pocket and putting it back into the other pocket of the exact same person. Robbing Peter to pay Peter. What exactly is the point?
Furthermore, as it is universal, multiple home owners and billionaires also benefit. Isn’t this one of the reasons why some of the charities now supporting the campaign, were so critical of the EPG in the first place?
What about Fairness?
We are not going to make any moral judgements about fairness. But there are valid questions to ask about the alternatives that the money could be spent on.
The table below lists alternative cost of living support payment schemes, already implemented. It calculates what an extra £2.7 billion would mean to those schemes. It is clear that certain vulnerable groups could benefit substantially from the extra funding if it was used in a more targeted way.
Judge for yourselves.
| Scheme | Payments made and planned (including for 2023/2024) | Potential enhancement |
|---|---|---|
| Cost of Living payment for those on benefits | £1,550 | £333 (+22%) |
| Pensioner Cost of Living Payment | £600 | £337 (+56%) |
| Disability Cost of Living Payment | £300 | £442 (+147%) |
| Household Support Fund | £500 million | £2.7 billion (+440%) |
| Souce; gov.uk energyscanner calculations |
What about “national mental health harm”?
If energy bills aren’t actually going up, is increasing the Energy Price Guarantee going to be an “act of national mental health harm”
Energy price change letters won’t necessarily trigger this; after all, it’s all in the messaging.
On the other hand, could inaccurate (and irresponsible?) scaremongering trigger that harm?
We have been on many consumer phone-ins recently on the subject of energy bills. We know that very many people are deeply worried about never ending increases in energy bills. Even although expectations of future energy bills are falling, if you are only looking backwards and comparing today’s energy bills with what you paid last year, all you can see is a never-ending cycle of unaffordable increases. Many of these households will already be well behind with paying their energy bills. To hear that their bills will keep on rising is incredibly distressing. Particularly when it is not actually correct.
Extending the Energy Price Guarantee – thoughts and comments
On energy bills going up…
Joe Malinowski, founder of energy and money saving site energyscanner.com commented….
“It may not feel like it for many households, but we are definitely over the worst of it as far as energy bills are concerned. Wholesale gas and electricity prices have collapsed and this will feed into lower energy bills throughout most of 2023. Even with the increase in the Energy Price Guarantee, virtually all households will see their energy bills fall in the spring and summer as falling demand outstrips the planned 20% increase in energy unit costs.”
On the cost and fairness of extending the Energy Price Guarantee at £2,500…
“The cost of funding the Energy Price Guarantee has dropped significantly compared to initial predictions. Extending the Energy Price Guarantee for a further 3 months at the £2,500 level would cost less than £3 billion. But does that mean it should be done? Vulnerable groups could benefit substantially from this extra funding if it was used in a more targeted way. And should those groups take precedence over universal payments to multiple home owners and billionaires?”
On national mental health harm…
Joe Malinowski, founder of energy and money saving site energyscanner.com commented….
“We know that many households across the country are stretched to the limit with their bills. They will be distressed to hear that energy bills are on the rise yet again. Is it right to further panic those households, when the reality is that we are past the worst, and energy bills are set to fall. Surely, now is the time to reassure households. Instead of irresponsible scare-mongeringthat should we not be informing households that the worst of the energy crisis is behind us?”
Read more
– Energy Price Cap Guide
– What is the Energy Price Guarantee
– Companies making cost of living payments
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