Re:cap: understanding the Energy Price Guarantee

British Gas wrote this in a customer email earlier this week:

‘As you may have heard in the news, the new prime minister [sic] has announced the Energy Price Guarantee. This means the average household cost of energy will be capped at £2,500 per year from the 1st October. And will be frozen at this rate for the next two years.’

So here’s the thing. Many people will misinterpret this. For example, here’s something one of our team overheard on their street last week:

‘I was going to cut back, but now that Truss has capped my energy bill, it’s ok. I’ve been paying about £2,500 a year, so it’s not going to go up at all for me.’

AAGHHHHHHHH!

Once again, the simplified coverage of energy prices means people might mistakenly draw conclusions from average household data, when really they need to understand their own household’s situation. 

Let’s recap (I’ve also explained this on camera if you’d prefer to watch). The most important thing to remember: the cap (and its latest rebrand, the Energy Price Guarantee) is not a maximum limit on the amount you’ll pay. It’s only a cap on the unit rates for electricity and gas. To be specific, if you’re on a standard variable tariff:

“The average unit price for dual fuel customers paying by direct debit will be limited to 34.0p/kWh for electricity and 10.3p/kWh for gas, inclusive of VAT, from 1 October.”

So, what matters is your household’s usage. If you use more than the average household, your new bill will be higher than the £2,500 headline figure. I think it’s misleading and dangerous for consumers to be told their bills are capped – they’re not. It’s also worth remembering that all households are getting a £400 rebate off their bills over the next 6 months, so that needs to be taken into account.

And there’s more. The other thing we have to think about is that the wholesale cost of energy is still up, dramatically. Last winter, the amount spent by a typical household on the cap was £1,277.

In 2021 it was £1,100 and deals were available as low as £800. This year we will still see over a third of households spending more than 10% of their disposable income on domestic energy. That’s a serious problem for those households, and their plight will have knock-on effects for the wider economy.

Speaking of which, in addition to the domestic front, we’ve still only had limited detail on the scheme to help businesses. Without support, exposed to wholesale costs, many businesses will struggle with their energy bills. This puts pressure on employment and sometimes the very viability of a business. Employees and owners are consumers too, and this is another potential hit to the economy.

On balance, the Truss/Kwarteng intervention certainly seems better for households than where we might have been heading – the typical household spend was forecast to go above £5000 this winter. But the next challenge is that we, as tax-payers, will have to pay for it eventually, and it looks like more borrowing is the chosen method. Whilst this should push headline inflation down, it doesn’t necessarily release upward pressure on interest rates. So households – especially mortgaged ones – will have to wait and see what tricky side-effects this fiscal policy could bring. 

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* since publishing this blog, the Energy Price Guarantee has changed and will now only be frozen up to April 2023.