Does your heart sink every time there’s a news story about energy bills? You are not alone. Every time a story breaks, my inbox goes in to meltdown as people desperately seek clarity about what on earth is going on and how the announcement will affect them.

In my opinion, the reason for this is everything about the energy market is far, far too complicated. I often despair as I try to unpick the implications of each new announcement, what it means for people right now and what the implications are for us all in the future.

If you want an example, energy regulator Ofgem has just announced a new Energy Price Cap (EPC) that comes in to force in April 2023. The news means the average bill should not cost more than £3,280, reduced from £4,279 in January. Only that’s not what we actually pay – now or then.

The Government’s Energy Price Guarantee (EPG) has fixed bills at an average of £2,500 a year. Well, fixed them for now, because that’s changing in April when the EPG goes up to £3,000. Only by that point, wholesale prices might be cheaper than this, so our bills could be lower.

Confused? You are not alone.

I’m going to do my best to untangle this for you all. But the fact of the matter is this. The people who contact me are concerned about unaffordable energy, incomprehensible bills, ludicrous errors, wonky meters, not being able to get help on the telephone and what the future holds. This is what the industry needs to address. Urgently.

So here’s my manifesto demands for the energy sector (and the Government).

  1. Prepayment meter customers should be charged the same price as everyone else (outrageously, it’s more expensive to be on these meters).
  2. Freeze the increase in the Government’s Energy Price Guarantee until July, as demanded by Martin Lewis.
  3. Make energy firms hire more customer service people to answer phones in less than 5 minutes – on free-to-call numbers. Oh and hire more people to sort out the millions of billing errors too.
  4. Make meters easier to understand.
  5. Put practical help for people struggling to pay bills above political point scoring.

…and here’s my plain English guide to what’s going on right now.

What is the Energy Price Cap – and what’s an average bill?  

Realistically, there’s no such thing as ‘average’ energy consumption. My job would be a lot easier if there was. Your bill is affected by a diverse range of factors, including; the tariff you are on, the meter you have, the size of your home, the number of people who live there, your specific energy needs and how energy efficient your home is. That means the whole concept of an average bill is a very blunt tool.

Ofgem measures energy usage in ‘kilowatt hours’ (kWh). This causes most people’s eyes to glaze over so journalists tend to go with ‘units’ instead. By Ofgem’s calculations, the average units used for a typical household is 2,900 units of electricity and 12,000 units of gas each year.

Every three months, they work out what the unit price will be and what the average bill will be. Given current wholesale prices, they’ve worked this out at £3,280 a year.

The Government’s Energy Price Guarantee

But wait! Aren’t we paying £2,500 on average right now?

Yes, we are, though that is going to change in April. Remember last year when we had the three different Prime Minister’s in a few short months? At that time, energy prices were threatening to top £5,000 or even £6,000 a year on average according to the energy consultancies. Belatedly, the Government realised that some things mattered more than a leadership contest. So they capped the maximum price of energy at a household average of £2,500.

This wasn’t popular at all with some economists and politicians. By agreeing to subsidise the amount of money that energy cost over £2,500, the Government was going billions in to hock. Back in January, this was estimated to cost just under £40 billion. So the Government stated that they would raise the price of the average bill to £3,000 from April.

…only, when 2023 began, wholesale prices started to drop. That means that the money the scheme has actually cost (us) has reduced significantly. Which has left some people – myself included – questioning whether the Guarantee really needs to go up in April.

The Ofgem Energy Price Cap

Just to confuse things, the Ofgem energy price gap is also still in play, though it doesn’t currently affect what you pay for energy. Ofgem now estimates that the maximum average price for energy should be £3,280. The Energy Price Guarantee trumps that at £2,500 so that’s what we pay on average till April when it goes up to £3,280. The Government subsidises the extra bit.

However, if the Ofgem Energy Price Cap drops below £3,000 when it is next announced (26 May 2023) then the Government Energy Price Guarantee ceases to exist and the lower limit applies.

Still with me?!

Energy Support Scheme

So as it stands, the average bill will go up to £3,000 from April. That’s an increase of £2,500. But in real terms, we’ll be paying more for our energy. Here’s why.

Back in October, the Government announced that we’d all be getting £400 (up from £200 announced earlier in the year) as a result of something called the Energy Bills Support Scheme (EBSS). People in Northern Ireland got £600. This was paid in a variety of ways, but for most people, it was automatically discounted off their bills. The £400 was divided in to six chunks – £66 in October and November, £67 December to March.

While this got quite a bit of publicity at the time, many of the people I speak to have forgotten about this payment because they didn’t physically see this money. So When the EPG goes up to £3,000 in April, the EBSS will have ended, meaning you’ll have an extra £67 to find.

What if prices drop?

In a development that many people weren’t expecting, the energy-watchers are predicting that the price of wholesale energy will drop below the £3,000 EPG around the time of the next Ofgem Energy Price Cap comes in to play.

Say prices drop to the level some energy consultants are predicting – £2200 – that’s lower that both the EPG and EPC. Because these limits cover the maximum on average you pay, that means we won’t be stuck with higher prices. Ofgem can set a new maximum price cap at a lower rate in line with its current schedule.

But an enterprising energy firm could drop its prices as the market changes. So if you are on a standard variable rate (SVR) as most of us are at the moment, then your bills could go down. We might – whisper it – even be able to switch to a better deal again!

Politics, budgets and freezing the Energy Price Guarantee till July

Martin Lewis wrote to the Chancellor earlier this month to ask him to freeze the £2,500 EPG till July for precisely this reason. After all, why raise bills by 20% and make us swallow the loss of the support scheme for three months when predictions are prices will drop?

I could not agree more.

However, in practice, there’s another big date on the horizon. The Spring Budget.

If the Chancellor keeps the cost of EPG at £2,500 in April to June, then that’s going to cost the Government more money, which means less money to play with in the Spring Budget. However, allowing the price increase to go up could have an impact on the reducing in inflation which economists are starting to predict might also be reducing dramatically.

So the Government has a choice. Smooth the waters for us all by freezing the EPG, or risk wobbling the economy for three months to give better Budget. Seeing as energy firms have to give us all one month’s notice before prices go up, we should have an answer soon.

I know what I want to see.

Featured in Times Money Mentor – Martyn James

Why the energy price cap won’t bring bills down

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