When Liz Truss ushered in the Energy Price Guarantee (EPG) last September, her government insisted that a universal subsidy scheme was necessary to make sure no one fell through the cracks this winter. But there was an internal argument for the scheme too: put a big down payment on energy bills now, No. 10 thought, and that will give cover to implement her tax-cutting agenda.
The latter, as we know, didn’t pan out. And now Truss’s biggest policy from her time as prime minister – one that ushered in price controls, as ministers determined what household would pay for the unit price of energy – might be at the start of its end. This morning, Ofgem announced that the latest energy price cap update – that will run from 1 April to 30 June – will be set at £3,280, a reduction of almost £1,000, down from £4,279.
Simultaneously, Chancellor Jeremy Hunt will be lifting the EPG from £2,500 to £3,000, as announced in last year’s Autumn Statement. This means the price cap will remain above the level of the Energy Price Guarantee – but only just. Under current plans, the government will continue to subsidise the average household at a rate of £280 a year.
This is the first price cap drop since Russia’s latest invasion. That it’s such a big fall comes down to the international success of countries managing to pivot away from Russia’s energy supplies and fill in the gaps faster than most anyone expected. The Office for Budget Responsibility's latest estimate for the price cap, published late last year, predicted a cap above £3,800 in Q2 this year, with energy prices still well above £3,000 at the start of 2024. It is now expected that the energy price cap will drop below the EPG in July (once the energy price cap falls below the government’s Guarantee, the subsidy goes). We have yet to come close to the outlier predictions, such as the cap reaching over £6,000 this spring.
So, barring another major international upset, the EPG is going to cost far less than originally predicted. While it was impossible to put an exact figure on a scheme that was going to freeze every household’s energy bills for two years, the rough estimates at the time were that the scheme could rival furlough for the most generous government welfare programme in peacetime, costing up to £100 billion. The OBR’s central and high scenarios for EPG costs in 2023-24, made in November last year, were £12.8 billion and £83.9 billion respectively. Already we know it is going to be far closer to the former.
That’s all assuming plans aren’t altered in the upcoming Budget. There are a few reasons to think they might be, but only marginally. Rishi Sunak’s original energy bill subsidies, dating back to right after Russia’s invasion, were always more targeted in their design – trying to reach those on the lowest incomes, and the most vulnerable, with government support. The Energy Price Guarantee pivoted to a universal approach, which saw even the wealthiest in the country get help with heating their homes. With the Guarantee rising by 20 per cent come April, it would follow the Sunak playbook to address this with direct top-ups for those who will struggle most with that rise.
And there might be some money to spend. January’s surprise surplus of £5.4 billion does not actually suggest the UK has money to burn, but it is likely to provide Hunt with a bit more wriggle room than previously expected. That, and a more positive set of forecasts from the OBR (Hunt had to base the Autumn Statement off figures calculated around Truss’s attempted borrowing frenzy and the LDI pensions scare), might give the Chancellor a bit more room to offer support. However, only a few weeks ago Hunt ruled out any ‘major new initiative’ that would require taxpayer cash. If there are more interventions, expect them to be targeted and limited.
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