The government’s cost of protecting households from soaring energy bills is set to double in the new year to £5billion a month after a rise in Ofgem’s price cap.
The energy regulator said on Thursday its price cap would rise to the equivalent of £4,279 a year for the average household from January.
Ofgem said the cap, which is adjusted quarterly, will increase by £730 for the three months from the start of next year. However, the government’s Energy Price Guarantee (EPG) limits the typical annual bill in Britain to £2,500 over the same period.
Although the importance of Ofgem’s price cap for households is reduced by the EPG, it still matters because the cost of the Treasury subsidy on the vouchers is linked to the difference between the two.
The government provides energy suppliers with the difference between the unit rate under the EPG and what they would have charged their customers had it not been in place, a rate set by the Ofgem.
The new cap will force the Treasury to pay 33 pence per unit of electricity and nearly 7 pence per unit of gas that households use. Energy consultancy Auxilione said it would take the cost of running the EPG from £7.8billion in the last three months of 2022 to £15.1billion in the first three month of next year.
Energy supplier Ovo estimates the government will pay around 33p every time someone uses their oven for half an hour or an electric shower for six minutes.
Chancellor Jeremy Hunt said in last week’s Autumn statement that the EPG would be increased to £3,000 for a typical household from April, which is expected to reduce the amount the Treasury has to pay in grant.
Average household bills were capped at £1,277 a year ago, below Ofgem’s price cap. This was due to rise to £3,549 from October.
However, former Prime Minister Liz Truss stepped in to introduce the EPG for two years. Hunt then truncated it to six months, before extending it by 12 months from April.
Consultancy Cornwall Insight has predicted that the EPG will cost the government £42billion in its entirety, or around £2.3billion a month. Investec estimates the policy will cost £24bn, or an average of £4bn per month, for the first six months.
EPG cost forecasts are highly dependent on the wholesale gas price, which is volatile, especially since Russia’s invasion of Ukraine.
Ofgem has changed the frequency of cap changes from every six months to quarterly to respond more quickly to movements in the energy markets. Cornwall Insight expects the cap to be reduced to £3,921 from April and then to around £3,400 for the final six months of 2023.
The Treasury said last week that £1.8billion had been paid out in October under the Energy Bill Support Scheme, cutting costs for more than 27million households. He said £136 million worth of vouchers had been provided to traditional prepaid meter customers.
The government hopes to finance part of the cost of the program through windfall taxes on oil, gas and power generation companies. The mild start of winter and the easing of the wholesale gas price will have contributed to reducing the cost of the policy for the taxpayer.
However, there are fears that bills will remain high next year as countries struggle to replace Russian gas supplies, which have been cut since the invasion of Ukraine.
The Department for Business, Energy and Industrial Strategy said: “The Energy Price Guarantee protects consumers against soaring energy costs, meaning people’s bills won’t go up. not in line with the current Ofgem energy price cap increase.”
Separately, ministers plan to launch a £25million public information campaign before Christmas to encourage people to save money and energy.
The campaign will advise eight changes to reduce bills, including lowering boiler temperatures, turning off radiators in empty rooms and switching off electrical appliances rather than leaving them on standby, the Times reported. The measures could save households up to £420 a year.
Truss had blocked a public information campaign, arguing that she could be considered a British “nanny”.