This briefing looks at the Energy Price Guarantee and how it works in Great Britain. It includes data on price caps and wholesale prices for gas and electricity.
What is the Energy Price Guarantee?
Following concerns over the effect of a proposed 80% increase in energy prices energy price rises, then Prime Minister Liz Truss announced that the Energy Price Guarantee (EPG) would be introduced from 1 October 2022 and last two years.
The EPG was to reduce the extent of price increases for domestic customers. Under the scheme, the Government sets maximum prices for gas and electricity and compensates energy suppliers for providing these at below cost prices.
How much will customers pay?
The EPG sets maximum unit costs. Maximum daily standing charges are set by Ofgem’s price cap. The EPG is normally expressed as an annual figure. It was originally set at £2,500 for two years from October 2022 to September 2024. It was later changed to £2,500 for the first six months (October 2022 to March 2023) followed by an increase to £3,000 for the following 12 months (April 2023 to March 2024). This is the annual bill that dual fuel (gas and electricity) direct debit customers with typical consumption levels would face if these prices remained constant across a year. Annual bills are not capped. Households which use more energy will pay more, those which use less will pay less.
Prices vary by region and are higher for prepayment meter customers and those paying quarterly bills.
The price increases under the first six months of the EPG have been softened by the £400 Energy Bill Support Scheme payment which is being paid in six separate monthly instalments from October 2022 to March 2023.
Without the EPG, customers would currently be paying more under the price cap. The regulator Ofgem still calculates the price cap level for each quarter.
Will energy prices fall?
Despite pressure to keep the EPG at the equivalent of £2,500 a year, the Government currently plans to increase it to £3,000 from April 2023. However, cuts in prices below the EPG level are forecast for the second half of 2023.
Wholesale energy prices have fallen from their summer 2022 peaks but there is a substantial lag before these feed through to consumers.
The latest price cap forecasts show it falling to well below the £3,000 EPG level in the second half of 2023. This would result in cuts in household bills as prices are capped by whichever is lower, the EPG or the price cap rate.
Lower wholesale prices may also lead to suppliers offering cheaper fixed tariffs, however it’s likely that suppliers will be cautious in their pricing and any return of competition to the market is likely to be slow. Even if prices fall as forecast, they will still be almost 70% higher than in winter 2021/22.