Energy Price Guarantee

Last updated; 24 September 2022

What is the Energy Price Guarantee?

The government has announced a new Energy Price Guarantee and it is MASSIVE.

From 1 October 2022, the previously announced energy price cap of £3,549 will be scrapped and replaced with a new, lower energy price.

The ‘Energy Price Guarantee’ will mean that a typical UK household will, according to the government, now pay up to (our emphasis – more on that below) an average £2,500 a year on their energy bill for the next two years.

It applies to all households in Great Britain. The same level of support will also made available to households in Northern Ireland through a different mechanism

The price guarantee will be in addition to the £400 energy bills discount for all households announced back in May 2022.

Before we delve into the detail, we think it is worth explaining firstly why it happened, what it means for consumers, and why we think it is such a big deal.

Why was the Energy Price Guarantee set up?

On 26 August 2022, Ofgem announced that the energy price cap would increase to £3,549 from 1 October 2021. This was an 80% increase on the previous 1 April 2022 level of £1,971. That in turn was a 54% increase on the level of 1 October 2021 (£1,277). Over the space of 12 months, consumers were facing the prospect of their energy bills going up by 178%. That’s an increase of £2,272 in just 1 year.

And it wasn’t about to end there. With the energy price cap lagging behind rapidly rising wholesale gas and electricity prices, households were looking at energy bills in 2023 that could top £4,000, £5,000 or even £6,000.

Clearly that was just not going to be affordable for the majority of households and something had to give. Fortunately, the government stepped in with the Energy Price Guarantee before a wave of financial hardship, misery, civil unrest and other such unpleasant stuff spread across the country.

What does it mean for you, the consumer?

This is best explained with the use of a graph or two.

What does it mean for your energy bills?

The first graph below shows how the Energy Price Guarantee compares with the Energy Price Cap. It shows…

  1. How the energy price cap has changed since it was first introduced on 1 January 2019 (blue line).
  2. The energy price guarantee from 1 October 2022 (orange bars), and
  3. The guarantee after taking into account the £400 energy bills grant

In a nutshell, the energy price guarantee will, from 1 October 2022, save the average household around £1,050 compared to what thy would have paid had the energy price cap not been scrapped. Those savings are likely to be considerably greater going into 2023 given that, without the guarantee, average energy bills could easily be in £4,000 or even £5,000 territory.

Energy bills will now increase by a more reasonable, and more manageable, amount. They will initially jump from £1,971 to £2,100 (+6.5%) once the £400 energy rebate is taken into account. On 1 April 2022, once the energy bills grant ends, they will increase again to the full £2,500 (+19%).

Energy bills will then stay at the £2,500 notional level for a further 18 months until the Energy Price Guarantee expires on 30 September 2024.

energy price guarantee and energy price cap compared - energyscanner

That’s the good news.

On the flip side, here is the not so good news.

Taking the energy bills grant into account, household energy bills will still be £823 (64%) higher from October 2022, than they were a year ago. Excluding the energy bills grant, that increase would have been £1,223 (96%).

So even though this intervention is both massive and very welcome, it is still going to be tough out there. Very tough indeed.

What does it mean for your monthly direct debits?

The graph below represents the same data as above, but expressed as a monthly direct debit payment as opposed to an annual energy bill.

The graph below represents the same data as above, but expressed as a monthly direct debit payment as opposed to an annual energy bill.

The stand-out bar, in orange, represents the planned energy price cap for October 2022 that fortunately did not happen.

The blue bars from October 2022 represent monthly direct debit payments net of the £400 energy bills grant. Because this grant will be applied to monthly bills, it will also therefore be factored into your direct debit payments.

Energy bills - monthly direct debits under the energy price cap and energy guarantee - energyscanner

All things being equal, and assuming there are no surpluses or deficits on your energy account, then average monthly direct debits will increase from £164 / month now to £175 / month from October 2022. They will then jump again to £208 / month from 1 April 2023. Barring any changes to your energy usage, they will stay at that level for the following 18 months.

Some energy suppliers may choose to smooth the 2 price increases into a single increased payment. In that case your direct debit will be somewhere in the £175 to £208 range.

If you pay quarterly by cash or cheque, or via a prepayment meter, your energy bills will be higher, and your payment profile different. We will post graphs of what those payments look like below.

Why is the Energy Price Guarantee such a big deal?

The Backdrop

There has been much criticism of the Energy Price Guarantee. The main arguments from the critics are that the cost of the guarantee will be colossal, and that it is not particularly well targeted at those who need the support most. Both of those criticisms are, of course, perfectly valid.

However, our view is that the government had to act in a decisive, meaningful and universal way, and the way they have done this makes sense. Here’s why.

Volatility and Inflation

The problem facing the UK economy was not just significant increases in energy prices, but the huge volatility in those prices. Before the energy price guarantee was announced, we were getting apocalyptic warnings from “experts” no-one had ever heard of, trying to outdo each other on a daily basis with who could come up with the most terrifying energy bill forecast; £4,000, £5,000, £6,000, £7,000…..

But that volatility creates uncertainty. And most people can’t live with uncertainty.

Uncertainty for…

  • Households and consumers not knowing how they will be able to afford their bills for the next month, let alone the forthcoming winter.
  • Businesses not knowing whether they need to lay off staff to pay their energy bills or to close shop altogether.
  • Employees not knowing how big a pay increase they need in order to afford their bills and to stay solvent.
  • Unions in terms of their wage demands. Unions will typically want not just an inflation linked pay increase, but also support with energy bills. But when energy bill increases account for around 35-40% of the inflation rate, then demanding both is not just double-counting, it gets us into an inflationary spiral of doom. Given the volatility and uncertainty, it is understandable that employees turn to their unions for advice. But when that advice leads to potentially unjustified industrial action, the problem is exacerbated.
  • And finally, let’s not forget the Bank of England. The average guy in the street won’t spend too much time worrying about this privileged group. But let’s cut them some slack for a moment.  They have a mandate to target an inflation rate of 2%. How are they going to do that when the domestic energy component can, on its own, can add 5% points in a single month?

The problem here is inflation.

Inflation

“Without price stability, the economy does not work for anyone.”

Federal Reserve Chair Jerome H Powell

Monetary Policy and Price Stability

Speech August 26, 2022

Jerome Powell is, of course, absolutely correct (even if we say so ourselves).

But inflation hits the poorest hardest. You don’t need to take our word for it. At the bottom of this article we list references from institutions ranging across the whole political spectrum, that agree with this basic assertion.

The solution

Therefore, if you are going to make a BIG financial intervention, you really need to do it in a way that puts a dampener on inflation. Ideally you should also try and do it in the least cost, most tax efficient way possible. And unlike the Energy Bills Grant, which was treated as a transfer and not a price reduction (well done Rishi Sunak), this intervention will reduce price levels (inflation) and reap all the benefits that flow from it.

The benefits

From 1 October 2022, CPI and RPI inflation will be around 2% points lower than it otherwise would have been. Peak CPI inflation is now likely to be below 11% in October 2022. That is less than half the hugely wild estimates put out by the more than adequately compensated economists at Goldman Sachs.

Rolling into 2023, the positive inflation benefit could be up to 5% points greater than it otherwise would have been.

The benefits of lower and stable inflation

There are several benefits that flow from this (directly and indirectly).

The price of goods and services linked to CPI or RPI inflation (broadband, telecoms, yes even energy bills) will see lower increases going forwards.

Employers, employees and their unions will have more clarity on the underlying increase in costs. This should lead to more realistic wage settlements hopefully reducing industrial action.

But crucially, any intervention that reduces inflation is at least partly (35% or so) self-funded. This is because it reduces the costs of interest payments on government debt.

Index-linked gilts, government debt where the interest paid or accrued is linked to RPI inflation, accounted for around a quarter (£503.7 billion) of the UK government’s stock of debt in March 2022. This means that, for each 1% point reduction in RPI inflation, the debt interest bill for the government reduces by £5 billion per year.

By reducing inflation by 2% points in 2022, the Energy Price Guarantee will reduce debt interest payments by £10 billion (annualised) from October 2022. Going into 2023 it could cut debt interest by up to £25 billion compared to where it would have been. And that interest saving can, if required, be used to fund more targeted interventions, as and when needed, further down the line.

How does the Energy Price Guarantee work?

Now that we have that out of the way, let’s talk about how the Energy Price Guarantee works.

The energy price guarantee will replace the energy price cap for the 2 years from 1 October 2022 through to 30 September 2024. Although it will replace the price cap, it will operate like it in some respects. Like the energy price cap, the energy price guarantee will put a limit on the unit rates for gas and electricity that energy suppliers can charge.

Unit rates for gas will be cut by 4.4p / kWh vs the 1 October Energy Price Cap (from 14.76p to 10.33p). Unit rates for electricity will be cut by 17.85p (from 51.9 to 34.0). These are for customers paying their energy bills be direct debit. For other payment methods the reductions will be the same, but the rates will be different (and slightly higher).

Standing charges however will remain at the same level as for the 1 October 2022 energy price cap. 28.5p / day for gas and 46.4 p/day for electricity.

The rates and standing charges applicable to the various payment methods are shown in Table below.

These new rates will be applied automatically to energy bills. There is nothing that you need to do.

The cost of the guarantee is being funded by government through the energy suppliers. The government will provide energy suppliers with the difference between these new lower prices, and what energy suppliers would charge had the guarantee not been in place.

Energy Price Guarantee – some important points

The really important bit is this. The energy price guarantee does NOT put a limit on the size of your energy bill. Use more energy and you pay more. Use less, pay less. So, you can do something about getting your energy bills down even further.

There is another proviso here to be aware of. The energy price cap guarantee does NOT apply to everyone.

Customers on fixed tariffs already below the guarantee level will get no further reduction. However, they get to stay on their discounted fixed tariff until the tariff end date.

Customers on tariffs above the guarantee level will see the same unit rate reduction but only down to the guarantee rates. In rare circumstances where you might have panicked and signed up for a super expensive tariff then, even after the gas and electricity unit rate reduction, you might still end up paying more than the guarantee. There is more information on this below and what you can do about it.

Read more …

  –  Everything you need to know about the energy price cap

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