Price cap sparks debate on energy bill aid – BBC News

  • by Kevin Peachey
  • cost of living reporter

image Source, Getty Images

The debate over government support to household energy bills will intensify after the industry regulator outlines the details of its price cap later.

Ofgem’s announcement will not affect the amount customers pay for each unit of gas and electricity as it is limited by government guarantees.

But it is likely to show that the cost to the government of the support is less than initially expected.

Campaigners say ministers must stop the increase in energy bills in April.

Chancellor Jeremy Hunt previously told the BBC that although the policy is being reviewed, he does not think the government has “room to do a big new initiative to help people”.

How much would you pay

Under the government’s Energy Price Guarantee (EPG), a household using the normal amount of gas and electricity in England, Wales and Scotland is currently paying £2,500 a year for energy. Without government support, that annual bill would have been £4,279 from January.

The Chancellor has already announced that the EPG will become less generous in April, meaning the typical household will pay £3,000 a year.

Ofgam will announce later on Monday what that bill would have otherwise been for April to July without the guarantee. Analysts at consultancy firm Cornwall Insight estimate it to be £3,295 due to a fall in wholesale prices.

The government compensates energy suppliers for the difference between the guarantee and the Offgem limit.

deal with it together

‘National Act of Loss’

The EPG started in October last year, and is scheduled to continue till April 2024. The drop in wholesale prices means the potential cost to the government could be billions of pounds less than initially thought, but still less than £30bn in total.

Such figures were highly volatile, and may still be. The government says the “savings” will not be money borrowed, but a pot of money available to be spent elsewhere. However, the figures have prompted dozens of charities and campaigners to call on the government to reverse plans for a typical annual bill to rise from £2,500 to £3,000 in April.

Consumer finance expert Martin Lewis described the bill hike as a “national act of loss”. The Labor and Trade Union Congress (TUC) has also made the same call.

TUC general secretary Paul Novak said, “The government must cancel its impending hike in household energy bills in next month’s budget. Households across the UK are being pushed to the brink of skyrocketing bills.”

The Liberal Democrats have gone a step further and want energy bills to be cut.

Suppliers must write to customers a month before a price increase, so the letters will be sent out later this week – that’s two weeks ahead of budget.

The government guarantee, like any energy price cap, does not limit the total bill. This limits the per unit cost of energy.

This is reflected by showing an annual bill for a household that uses a moderate amount of gas and electricity – set at £3,000 in April. However, a billpayer living in a small, well-insulated flat will use less energy, so pay less. Anyone in a big, swanky house will pay more.

The government offered an extra £400 discount on everyone’s bill this winter – with six monthly discounts on a bill worth around £67 – but this support will end in April. Lump sum payments are also available in Northern Ireland, which has a more complex market, which includes many households using heating oil.

The cost-of-living payment, which can cost hundreds of pounds, will continue to be paid to families across the UK on low incomes and benefits, as well as pensioners and people with disabilities.

Despite the support, the charity National Energy Action estimates that 1.5 million more households will move into fuel poverty (typically spending more than 10% of their income on energy) as a result of bill increases in April.

fixed fee

Ofgem’s announcement later will also update households on how much they will be paying in permanent fees. These are the fixed daily rates you pay for having a gas and electricity connection to your home.

Changes in electricity transmission rules, which were agreed earlier, may increase these charges. Currently, these are outside the government’s guarantee, so this could lead to a further – but relatively small – increase in people’s bills. These vary by region, so the cost will also depend on where you live.

Separately, people who pay for their energy by cash or check when they receive their bill currently pay almost £250 more per year than those paying monthly by direct debit. Historically, Ofgam has said that the costs for these customers were higher for suppliers because they were more likely to miss payments.

Customers with top-up prepayment meters are also billed £55 more per year than a typical direct debit customer, due to higher fixed costs.

Ofgem is expected to update the data later on the difference in bills between different types of payments.

future bills

Forecasts suggest household bills will fall short of government guarantees by July and will again be controlled by Ofgem’s limits due to a fall in wholesale prices.

It will also reduce the amount that the government receives in windfall taxes.

However, Ofgem boss Jonathan Brearley warned that customers should look into how prices may change in the future and “do their homework” before making a decision.

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