The latest forecasts for the Default Tariff Cap (price cap) released by Cornwall Insight, have shown energy bills for a typical household are predicted to be below the government’s Energy Price Guarantee (EPG) from July (Q3 2022) this year. Despite the fall in these forecasts, bills are set to remain significantly above pre-pandemic levels - settling at around £2,800 for the second half of 2023, £300 above the current capped EPG rate of £2,500.
Falling wholesale energy prices are the main contributor to the predicted drop in the cap forecast. But these falls will not have their main effects until Q3 2022 as energy suppliers typically buy their energy ahead of time (hedging) to comply with the cap. This means falling day-to-day wholesale prices (spot prices) have a limited impact in the short-term.
The EPG was introduced to partially shield consumers from high energy prices, with the government capping consumer energy bills, and compensating suppliers the difference between the cap and the EPG. With the EPG currently set to increase to £3,000 per year from April 2023, if the price cap does indeed ultimately end up below the prevailing EPG level, then the support scheme will effectively no longer be a cost to the government as we move into the second half of 2023.
Even if current levels of wholesale prices are maintained, then the pressure may well still be there for the government to assist consumers in homes and businesses, as bills will still remain extraordinarily high. For example, our current forecast of the Q3 2023 domestic cap of just over £2,800 per annum is over twice the corresponding 2021 cap level.
Despite the drop in the price cap, the overall cost to the government of the EPG for the period to 31 March 2024 is still a predicted £37bn, money which will need to be recovered through the taxpayer.
Dr Craig Lowrey, Principal Consultant at Cornwall Insight said:
“While it is positive to see a drop in the price cap forecast, household bills are set to remain high. With the Energy Price Guarantee rising in April, the second half of the year will still see a typical household facing bills that are well above historic levels and facing costs that many can ill afford.
“The cap’s fall below the threshold of the EPG will, if wholesale prices continue at this level, effectively see the scheme no longer costing the government. We must remain cautious as the government has essentially been underwriting a volatile wholesale energy market - one which is likely to remain unstable throughout the year. Even if energy prices continue at current levels - which is a big if - the costs to the government over the full period of the EPG are still contributing to government borrowing and will ultimately fall at the feet of consumers in the form of higher taxes.
“The government have indicated a desire to see reform in the energy market, including a review of domestic energy prices. It is clear that blanket measures of bill support are not providing adequate protection for the most vulnerable and more targeted measures including social tariffs may be something for the government to consider. While the details of future support are best left up to the judgement of politicians, the forecasts demonstrate we must look beyond the current policy if we are to see a fairer, more cost-efficient and enduring way of reducing household energy bills for those who need it the most.”