UK domestic energy market overview

Last updated: 26 July 2023


Want to know what’s happening in the domestic energy market in the UK in 3 simple charts? Then you’ve come to the right place

We focus on 3 key issues. Energy bills, direct debits and household expenditure on energy. To keep it brief and to the point, we have avoided technical terms and jargon. For those interested, there are links to more information in the article.

This article will be updated with each change to the energy price cap or other significant market movement or intervention.

Energy bills

Firstly, let’s dive into energy bills.

Figure 1 shows energy bills for the average UK household since 1 January 2023, coinciding with the introduction of the Energy Price Cap. The chart compares the Energy Price Cap (blue line), with the Energy Price Guarantee (EPG) (orange bars) and the EPG after taking into account the £400 Energy Bills Support Scheme paid to all households in instalments between October 2022 and March 2023 (grey line). The actual net energy bill paid by households is set by the lowest of these 3 lines.

On 1 July 2023, the Energy Price cap was cut by a whopping £1,206 (37%), from £3,280 to £2,074. This was for the average household paying by Monthly Direct Debit. There were even larger falls in the price cap for customers paying via cash/cheque or prepayment meters. For Cash/Cheque customers, the cap fell by £1,270 (37%), from £3,482 to £2,211. For households with prepayment meters it fell by £1,248 (38%) from £3,325 to £2,077.

However, none of us has seen anything like a £1,200+ cut to our energy bills. Why? Basically, because we were not paying the full Energy Price Cap rates to start with.

Why energy bills are not falling by £1,200

Here’s how it works. When the Energy Price Cap is above the Energy Price Guarantee, we pay the Government subsidised (meaning taxpayer subsidised) EPG rates. Conversely, when the Energy Price Cap falls below the EPG, the Guarantee serves as a backstop, and households move onto the lower Energy Price Cap rates. Since none of us were paying the full energy price cap rates (£3,280) our energy bills have fallen, but from the lower starting point of £2,500.

So, while the Energy Price Cap fell by over £1,200, we all saw much smaller reductions. We only get to pocket the difference between the new Energy Price Cap (£2,074) and the EPG rates (£2,500). This amounts to an annualized £426 (17%) for those paying by direct debit. So while the Energy Price Cap was cut by 37%, our energy bills will fall by less than half this amount (just 17%).

Still, it is not to be sniffed at. A £426 cut to energy bills is actually the biggest cut ever, and marks the first cut to household energy bills in nearly 3 years.

Energy price guarantee and energy price cap compared - image on

Energy Direct debits

Monthly direct debit payments are also set to fall.

Figure 2 shows how monthly direct debit payments, for customers on standard default tariffs, have changed since January 2019. The dark blue bars represent the monthly energy bills for Energy Price Cap tariffs. The orange bars depict payments during the Energy Price Guarantee period. The light blue bars represent what monthly bills would have been had the Energy Price Guarantee not been in place. Without intervention, average household energy bills would have exceeded £350/month. Yikes!

While energy bills have risen compared to last year, the rate of annual increase has slowed significantly. After nearly doubling (+96%) during the winter of 2022/23, the annual increase has now dropped to just 5.2%, well below headline inflation. As things currently stand, the annual rate of change is expected to turn negative from October 2023, even if the energy price cap remains unchanged.

Energy direct debit payment trends since January 2019 - image on

What about energy bills for other payment methods?

Domestic energy usage is highly seasonal with heating being the primary driver of demand over the winter period. Paying by monthly direct debit smooths that seasonality out over the year. It takes the estimated, forward-looking, annual energy bill and divides it into 12 equal monthly chunks. Handy for budgeting.

Households paying their bills quarterly, or via a prepayment meter, don’t see that smoothing. Their bills ebb and flow with the seasons. On the one hand that means their energy bills over the summer quarter will shrink considerably as falling unit energy costs meet collapsing energy demand. Multiplying the 2 smaller numbers, means that these households will see their energy bills fall by 35% from Q2 (April-June 2023) to Q3 (July-September 2023). In fact Q3 2023 energy bills will be only a third of what households were paying during the winter period (Jan-Mar 2023). However, on the flip side, that means those energy bills will then jump again, double in fact,  as demand energy kicks in over October-December 2023.

Swings and roundabouts!

Aggregate consumer spending on energy

We’ve looked at the energy market from the perspective of the consumer and the household. What about the impact on consumers as a whole?

Figure 3 below shows an estimate of the value of the UK domestic energy market, measured at Energy Price Cap rates (including the Energy Price Guarantee subsidy where applicable) and how it has changed since 2019. For those interested, the assumptions and calculations behind the graph are explained at the bottom of this article.

Between January 2019 and July 2021, the domestic energy market remained relatively stable, valued within the range of £30 billion to £35 billion (1.4% – 1.6% of GDP). However, from autumn 2021, when the current energy crisis kicked off, market value skyrocketed in proportion to rising energy prices.

From October 2022 through to June 2023, customers were spending an annualised £70 billion for their energy bills directly (around 7.7% of disposable income). On top of that, taxpayers were subsidising households (essentially taxpaying households where basically subsidising themselves) to the tune of an additional £50 billon annualised via the Energy Price Guarantee. At its peak, in Q1 2023, the domestic energy market reached a staggering annualised value of around £120 billion, equivalent to 5.4% of GDP.

The market has now settled around the £60 billion mark. Although this is around half where it was at the peak, it still nearly double the size it was before the energy crisis unfolded.

UK domestic energy market value at Energy price cap rates since 2019 - image on

Household Budgets Boosted by £12 billion

This latest energy price cut has injected an annualised £12 billion back into consumers’ pockets. The £426 energy bill saving is equivalent to just 1.3% of household disposable income. However it’s a positive step for stretched household budgets and it’s one of the few prices going down, rather than up.

Furthermore, there is another benefit. With the energy price cap having fallen below the energy price guarantee, taxpayers will no longer be on the hook for funding the EPG subsidy. energyscanner estimates this subsidy has cost the Treasury £30 billion, which will ultimately need to be repaid through higher taxation. That amounts to £930 per taxpayer or £1,060 per household. Since not all households pay income tax, those who do will shoulder a greater share of the burden.

What next for energy bills?

The next level of the energy price cap, which runs for the 3 months from 1 October 2023, will  be announced late August 2023. There is scope for the energy price cap to fall a bit further, possibly to £2,000, but not by much.

Wholesale energy price falls, which have been substantial, have now largely worked their way into lower domestic energy bills. To get further reductions to energy bills, consumers need another tool in their toolbox. They need a competitive energy market. In a fully competitive energy market energyscanner estimates that domestic energy bills could fall a further £8 billion.

With wholesale energy markets having stabilised for the last 6 months at least, competitive energy tariffs should have emerged by now. Indeed, it’s very concerning that we have yet to see any signs of price competition emerging. The reasons for that are beyond the scope of this article, but regulation seems to be playing a part holding the market back. If that turns out to be true, it would be denying consumers the chance to boost their depleted household finances by another £8 billion. Another energy scandal in the making?

We hope you enjoyed this article. If you have any comments, or a story to share about your experiences with energy bills, good or bad, please leave a comment below.

Read more

  –  Energy price guarantee – what is it and how does it work?

  –  Which energy suppliers have gone bust?

  –  What is the energy price cap?

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