The amount that energy companies can charge for electricity and gas will increase from January, but households will be protected from this increase.
Ofgem, the energy regulator which limits how much suppliers can charge for each unit of electricity and gas, has raised its cap for the first three months of next year to 67 pence per kilowatt hour (p/kWh ) for electricity and 17 pence p/kWh for gas.
This would typically see a typical household’s bill rise to £4,279 a year.
However, the government energy price guarantee means that households will be protected from the increase.
Introduced on October 1, the guarantee limits the amount the typical household pays for its wholesale business energybringing the average annual bill to £2,500.
This government cap will be in place until April next year, when the threshold will be raised to £3,000.
Households won’t have to pay for the increase, so it may not be immediately obvious why Ofgem’s announcement today is significant.
This is because the energy price guarantee is a government subsidy, so taxpayers will continue to foot the bill, albeit indirectly.
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And the cost is enormous.
Along with a similar, albeit less generous, scheme for business customers, the cost of the package could top £38bn over 18 months, according to the Institute for Fiscal Studies.
It is impossible to be precise as the actual cost depends on wholesale energy prices (luckily for the government these have come down in recent months).
To put that into context, that’s around half of the £100billion that has been spent on furlough aid and the self-employed income support scheme cost over 18 months during the pandemic.
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The cost would have been even higher – around £55billion – had the government not decided to cut support from April next year. Liz Truss’ government originally planned to keep support at an average of £2,500 for 2 years.
Economists have also warned that households could also end up paying the price in higher inflation.
Government support has so far been untargeted and some people will need the money more than others. The support package represents a significant boost to the economy at a time when inflation is at its highest level in 41 years.
Earlier this week, the Organization for Economic Co-operation and Development (OECD), the Paris-based think tank, warned that the support would “increase pressures on already high inflation in the near term”.
This will force the Bank of England to raise interest rates, it warned, pushing up borrowing costs across the economy.
Britain is not alone in this. France and Germany are also at risk of falling into the same predicament, the OECD has warned.
So while Ofgem’s price cap increase may not affect households immediately, the costs will ultimately be borne by us all.