Households across the UK are struggling to make ends meet. With inflation still running at over 10%, debt rising and more households than ever living in fuel poverty, polling last week found that 2 in 5 people in the UK are rationing essentials just to keep up with debt repayments.
After months of headlines around falling wholesale prices, people might very reasonably have expectations that their bills should now be falling too. Unfortunately, the cost of supplying energy to households is still extremely high.
Energy companies buy most of their energy a season, or even a year, in advance. This is called ‘hedging’, and it helps protect suppliers from being exposed to sudden price spikes. Such hedging delayed and reduced the impact of peak wholesale prices throughout last year. However, it also means the effects of high prices take time to subside.
While recent falls in wholesale prices have shaved an estimated £70bn off the government’s financial support costs, they will not be fully felt in customer bills or Ofgem’s price cap until the summer and beyond. Nevertheless, the outlook has improved considerably, if highly uncertain, with industry estimates of the price cap falling to £2,362 for an average annual bill by July.
In the meantime the price cap is likely to remain well above £3,000, meaning customers are relying on the Government’s Energy Price Guarantee to shield them from these higher prices.
The worst possible time for raising prices
With such a backdrop, this would be the worst possible time for a large increase in energy bills. Yet this is exactly what households are facing if Government chooses to press ahead with its plans to increase the rate of the Energy Price Guarantee (EPG) in April from £2,500 to £3,000. Coming alongside plans to end Energy Bill Support Scheme (EBBS) payments which have provided a lifeline to households this Winter, the result could see the average household’s direct debit for energy rising from £142 to £250 per month from April 1st.
National Energy Action anticipates that without intervention for this April an additional 1.7 million households will become fuel poor, and Citizens Advice analysis estimates the change will double the number of people unable to afford their energy bills from April, increasing to around 1 in 5.
To be clear, Government intervention has been essential in shielding households from the very worst of the energy crisis. And despite coming in £70bn under estimate, support has not come cheap, with the NAO estimating the total financial support for rising energy bills has cost £69bn. But it is still the case that household bills are around 2.5 times the pre-pandemic rate and are stretching millions of household budgets to breaking point. So, while it is right Government is considering the introduction of targeted support options such as a social tariff for future years, the need to avoid universal bill increases in the near term is acute.
Extending the EPG at £2,500
It is little wonder then, that we are seeing widespread calls from charities, consumer groups and organisations that work right across the energy industry warning Treasury not to raise the Energy Price Guarantee (EPG) in April – recognising that, while it is not perfect, the EPG remains the only practical way of getting support to all who need it now.
Organisations and charities such as Citizens Advice, National Energy Action, Money Saving Expert, Age UK, End Fuel Poverty, Resolution Foundation, Money Advice Trust, StepChange, Warm This Winter and more have all agreed that the increase should be postponed or reviewed, and urged the Chancellor to take urgent action.
Whilst the Chancellor has not yet ruled out any changes, signals so far have been that the EPG will rise in April, as planned.
We remain hopeful that sense will prevail, and that the relatively modest fiscal cost of smoothing the road towards lower prices later in the year will prove as obvious a choice to the Chancellor as it does to all those calling for it.
However, it will not be enough to wait for the Spring statement to decide.
Timing is essential
After 18 months of crisis and confusion in the energy market, customers need clarity. Ofgem will announce the level of its price cap for April to June on February 27th. Within days energy suppliers will need to write to households with new prices for the coming quarter. In the absence of a Government decision to maintain the EPG level, these prices will be set at the higher level of a £3,000 average annual bill.
To quote Martin Lewis of Money Saving Expert in his recent letter to the Chancellor, “the damage to people’s pockets and mental health of another round of energy price rise letters is disproportionate.”
Announcing any changes to the EPG needs to happen on, or around the same time that the April Price Cap is announced by Ofgem (February 27th) to minimise the need for multiple, confusing communications and unnecessary worry over future bills.
Operationally, an early decision is vital to ensure the Guarantee can be delivered correctly. This is particularly acute for the most vulnerable households, where an announcement would need to be made by 2 March to allow enough time to ensure that the right rates are loaded onto traditional prepayment meters.
While energy suppliers will stand ready to do what it takes to get the correct support to customers as quickly as possible, delaying a decision until the Spring statement risks exposing the most vulnerable to more expensive rates, causing confusion and anxiety for millions and taking resources in customer service and support away from where they are needed most.
We are calling on the Government to listen to the many organisations, experts and consumer champions calling for the same thing, to act urgently and use a fraction of the money it has saved to avoid making things worse for households who are already struggling.
 Calculated based on 6 months capped at £2,500 annual bill pro rated less £400 Energy Bill Support
 Calculated based on £3000 average bill split over 12 months