Ofgem price cap drop good news for Government but not for Britons

Ofgem vow to take ‘further sanctions’ against failing suppliers

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Government support schemes spared households from the worst of the energy crisis this winter. But despite wholesale prices and the Ofgem cap coming down, people will soon be paying more when the Energy Price Guarantee (EPG) goes up at the end of March. Public sector borrowing is also falling, but the Government is unlikely to budge in the Spring Budget.

The energy price cap enforced by state regulator Ofgem limits the unit price of gas and electricity suppliers can charge so that the average annual household bill remains below a determined threshold.

On Monday, Ofgem announced that from April 1 the cap – currently set at £4,279 – would fall by almost £1,000 to £3,280. 

The energy crisis is not over, but wholesale gas prices in the UK are now below where they were at the outset of the war in Ukraine a year ago.

The cost-of-living crisis is not over, but inflation peaked back in October and has since fallen for three consecutive months.

And yet, household energy bills will soon be higher than ever before. Why?

In November, Chancellor Jeremy Hunt established the EPG, a scheme designed to save people money by capping costs even lower, with the Government fronting the difference to suppliers.

Set at £2,500, the Department for Business, Energy and Industrial Strategy (BEIS) claimed the initiative would save the typical household in Great Britain around £900 compared to undiscounted prices over the winter.

However, the EPG will be bumped up to £3,000 in April – at the same time the Ofgem cap comes down. This figure is more than Britons have ever paid before and is more than double the £1,360 annual average in 2019.

At the same time, the Energy Bill Support Scheme – dispensing a lump sum of £400 to homes off-grid – will also come to an end.

With consumers set to lose, and the ability of energy companies to make extraordinary profits wearing thin as market prices return to normal, it appears that only the Government is poised to gain.

In response to the lowering of the Ofgem cap on Monday, analysts Cornwall Insight said raising the EPG by £500 was likely to save the Government £2.5billion.

While the difference to be fronted will shrink below £300 from April, the researchers’ forecasts for the second half of 2023 suggest the EPG will “not cost the government any money from July.”

It could be argued that this was only ever an emergency measure to ensure households weren’t crippled by bills over the winter and that the Government incurred significant amounts of debt to fund the scheme – requiring £7billion in borrowing in December alone.

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That month, net borrowing for the public sector hit £27.4billion, according to the Office for National Statistics (ONS), the highest monthly total since records began 30 years ago, including throughout the coronavirus pandemic.

Think tank Resolution Foundation estimated the cost of the EPG over winter to have been £16billion.

However, in January the Treasury recorded a £5.4billion surplus – over ten times that forecast by the Office for Budget Responsibility (OBR). Borrowing throughout the financial year to January also came in £30.6billion lower than predicted.

As a result, the Chancellor has faced calls to extend and expand Government support to help blunt the cost-of-living crisis, or use the money for select public sector pay rises. In the run-up to the Spring Budget 2023 – scheduled for March 15 – Mr Hunt’s priority appears to be debt reduction.

Windfall levies imposed on oil, gas, and renewable energy producers are also expected to bring in £54billion over six years. The Treasury says this will “help fund energy bill support for households and businesses” but the latest insights suggest it that may not be necessary.

A Department for Energy Security and Net Zero spokesperson said: “Government support will continue to help households with their energy bills.

“We know this is a difficult time for families, which is why the Government has covered around half of the typical household’s energy bill this winter, and by the end of June the Energy Price Guarantee will have saved a typical household in Great Britain around £1,000 since it began in October.”

“In the meantime, we’re committed to helping people with rising costs by reducing inflation and growing the economy. The cost of energy has already been falling and we expect this to drop further over the coming months, which we fully expect suppliers to pass onto their customers.”

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