Jeremy Hunt should hold energy price guarantee at £2,500 as Ofgem lowers price cap

The cost of energy is tumbling, and so is Ofgem’s energy price cap. The cap, which had equated to annual gas and electricity costs of £4,279 for a typical household paying by direct debit, has fallen to £3,280.

That figure is currently irrelevant to consumers as a result of the government’s energy price guarantee (EPG), which holds bills at £2,500. This is where it starts to get perverse. Because, while wholesale energy prices have fallen by a lot, and the cap is going to fall by a lot, the price the consumer pays is going to rise by 20 per cent to £3,000 under plans formulated by chancellor Jeremy Hunt.

True, the new cap and guarantee figures cover the three months from April to the end of June, when householders’ energy costs are, obviously, lower than in the winter.

But the EPG increase is still going to hurt hard-pressed bill payers, most of whom have also been benefiting from an additional £400 government subsidy through the winter months, which is due to fall away. Needless to say, energy bills rising like this will power up inflation.

Here’s where it gets interesting. Per an analysis from Cornwall Insight ahead of the announcement, it would cost the government £2.5bn to scrap the increase and hold the guarantee at £2,500 based on the cap it is projecting. On its own that is a big number, but it is a relative drop in the ocean in government terms. It is also a small fraction of the overall cost of the scheme.

Based on an EPG price of £3,000, Cornwall Insight puts this at £26.8bn (we’re including costs already incurred as well as the projected future cost). If the cap is held at £2,500 the number comes out at £29.3bn, which is still far below the original projections, which were made when it was assumed energy prices would stay higher for longer.

Per Cornwall Insight’s estimates, the July cap comes in at £2,153.34, which is very similar to the September one (£2,161.05). These are still high prices by historic standards, but if the consultancy is even close to being right, the cost of the energy price guarantee falls to zero for the rest of the year.

The most recent review of the public finances, for January, revealed that the government was in surplus to the tune of £5.4bn when a chunky deficit had been forecast. True, these monthly figures are notoriously volatile, as I wrote when they were published. The chancellor, who has consistently talked of facing “tough choices”, made note of that fact, and also stressed the lack of headroom he has when taking into consideration the government’s fiscal rules.

But he clearly has some wriggle room, including the capacity to hold the EPG. The benefits of doing so would be substantial because, while the £2.5bn cost is relatively small, such a move would have a big impact on household budgets.

The TUC argues that one-tenth of the average UK monthly salary will have to be earmarked for energy bills if the EPG rise goes ahead and they average £250 a month. That is more than double the amount workers were paying in March 2022, when average bills were £107 a month, 4 per cent of the UK average monthly salary.

A full-time minimum-wage worker, on the other hand, could face bills worth 16 per cent of their monthly salary when the price cap increases, up from 8 per cent in March 2022.

It should be stated that people’s actual bills will depend on their circumstances, including the size and energy efficiency rating of their home, and the amount of energy they use.

But even if you accept that the EPG is poorly targeted – it provides the greatest benefits to rich people with big homes – action to reduce the pain of high bills would still be greatly welcome among lower income groups, and particulalry by elderly and disabled people. They typically require more energy to heat their homes. Disabled people often incur brutally high costs in powering the equipment that keeps them alive. Ventilators and the like.

This brings us to the final part of the equation: the politics. Holding the cap would clearly be a hugely popular decision on the part of a government that is plumbing the depths of unpopularity and is busily trying to explain away empty supermarket shelves (again) and Brexit failures (again) among other things.

Given the low cost, the high financial benefit to voters and the high political benefits to the government, what’s standing in Hunt’s way? He could – and should – hold the cap.