Why the energy price cap drop does not mean bills are going down

The Energy Price Cap (EPC) is the maximum amount a utility company can charge an average customer in the UK per year for the amount of electricity and gas they use in kilowatt hours (kWh). It is designed to prevent businesses from simply passing on cost increases to the consumer.

Set by the regulator Ofgem and first introduced in January 2019, the cap only applies to customers who are on a standard variable tariff, typically a provider’s default and most expensive option.

It does not safeguard consumers against global market fluctuations, and does not limit an individual’s overall bill – if you use more than the “average user”, you still pay more.

The rate is now reviewed quarterly, following changes introduced last year, and on Monday, Ofgem announced a 23 per cent drop in the EPC from £4,279 in January to £3,280 in April in response to falling wholesale gas prices.

While that might sound like welcome news, energy campaigners are warning that households could actually end up paying more from April, not less.

This is because of changes in the government support measures introduced last year to tackle soaring domestic energy prices. The price-rises were driven in part by market upheaval caused by the war in Ukraine.

Such was the severity of the cost of living crisis last autumn that Ofgem’s announcement that a rise from £1,971 to £3,549 was due to come into force in October prompted the government to intervene. This followed a long summer of inertia on the matter while ministers were distracted by the Conservative Party leadership contest, brought about by the defenestration of Boris Johnson.

New prime minister Liz Truss announced in September that, despite the opposition to “handouts” she had voiced during her campaign, her administration would move to introduce what she called an energy price guarantee (EPG), ensuring that average users would pay no more than £2,500 per year for their electricity and gas for two years, with the government subsidising the remainder as stipulated by the cap.

She claimed that the EPG would help households to save £1,000 a year, and would come in addition to the £400 direct payment promised by the then chancellor, Rishi Sunak, earlier in the year as part of his Energy Bill Support Scheme, which would be kept.

However, Ms Truss was criticised by the opposition for failing to introduce a windfall tax on the massive profits being enjoyed by oil and gas companies, seen recently in the jaw-dropping results shared by the likes of Shell, BP and British Gas.

Not long after, the disaster that was the “mini-Budget” spelled the end for her chancellor Kwasi Kwarteng and, shortly after, for Ms Truss herself.

With Mr Sunak in No 10 and Jeremy Hunt installed in the Treasury, it was announced that the EPG would only run until April 2023 before being replaced by a plan that would “cost the taxpayer significantly less”.

Mr Hunt has since announced that the EPG will be raised by 20 per cent to £3,000 from April for a further 12 months. This is a considerably less generous offering than is currently in place, and it comes after a long and difficult winter that has stretched household budgets to breaking point, with domestic energy bills still twice what they were a year earlier and double-digit inflation driving up the cost of everyday goods in supermarkets and on the high street.

With the EPG at £2,500 and Mr Sunak’s £400 discount in play, the average household was actually paying around £2,100 a year in bills.

With the EPG climbing to £3,000 and that £400 rebate gone, British households now face “a £900 cliff-edge in annual energy costs”, National Energy Action CEO Adam Scorer told Sky News on Monday – a scenario he said was untenable for many families as he urged Mr Hunt to avert it by reversing the EPG increase.

Consumer finance expert Martin Lewis also warned that bills would rise by around 20 per cent because of the government’s actions, and told Good Morning Britain: “Because the cap is still higher than the energy price guarantee, the cap is irrelevant.”

Mr Lewis did add that, from July, the EPC is expected to drop to £2,100 and be lower than the EPG for the first time since the introduction of the latter, at which point the government will cease to subsidise energy prices.

“This is why I wrote to the chancellor two weeks ago saying ‘Please do not do the price increase in April,’” Mr Lewis said. “It will only likely be in effect for three months. It seems to be an act of national mental-health harm to send millions – almost everybody – a letter to say, ‘Your energy bills are going to go up by 20 per cent again when they’ve already more than doubled,’ just for the sake of three months.”

His call for the increase to be scrapped was supported by UK Energy and at least 80 charities.

TUC general secretary Paul Nowak agreed with Mr Lewis, saying on Monday: “Energy bills are out of control. The government must cancel April’s hike. With the cost of wholesale gas plummeting, ministers have no excuse for not stepping in.”