The energy price freeze will now end in April: how will Jeremy Hunt’s scaled-back plan affect you?

woman looks at rising energy costs

Credit: Getty

Money


The energy price freeze will now end in April: how will Jeremy Hunt’s scaled-back plan affect you?

By Katie Rosseinsky

3 years ago

2 min read

Jeremy Hunt has announced plans to end the current energy price guarantee in April 2023 rather than October 2024.

The government’s energy price freeze will now last just six months, following an announcement by the new chancellor Jeremy Hunt.

Last month Liz Truss, the prime minister, set out plans to cap the average household energy bills at £2,500 from October for two years, scrapping the Ofgem price cap that had previously been set at £3,549.

However, Hunt has now said that the energy price guarantee will be reviewed in April, meaning that bills could be set to rise from then. Energy support for businesses will also come to an end.

The chancellor has suggested that the current measures, which apply to all households regardless of income, could be more targeted to support those most in need, but concrete details are yet to be announced. The move, which came as Hunt reversed “almost all” of his predecessor Kwasi Kwarteng’s mini-budget, is designed to “cost the taxpayer significantly less than planned”.

Here’s what you need to know about the plan and the recent changes… 

What is the energy price freeze?

Liz Truss

Credit: Getty Images

Under the current plan, bills are frozen at a lower rate than Ofgem’s October price cap of £3,549.

The unit price of electricity is capped at 34p per kilowatt hour (with a daily standing charge of 46p) while gas is capped at 10p per kilowatt hour (with a daily standing charge of 28p).

This means that the average annual household bill will be capped at £2,500, though households with above-average consumption will pay more. The scheme is universal, and every household will also receive a £400 one-off payment to help with their energy bills.  

What has changed?

The scheme is now set to last until April 2023 rather than until October 2024, as Truss originally announced.

The biggest single expense in the growth plan was the energy price guarantee, Hunt said yesterday. “This is a landmark policy supporting millions of people through a difficult winter and today I want to confirm that the support we are providing between now and April next year will not change.

“But beyond that, the prime minister and I have agreed it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices.”

Instead, there will be “a Treasury-led review” into how energy bills will be supported beyond April next year, and “the objective is to design a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need”. 

Energy support won’t necessarily come to an abrupt end in April, but it might be more targeted, meaning that some households could see their bills rise. We will have to wait for the outcome of the review to learn more about the new plans. 

It’s thought that Hunt could also introduce some incentives for households to reduce their energy consumption.

How much could energy bills cost next year?

According to estimates by consultancy Cornwall Insight, the average annual bill could skyrocket to £4,347 next April after the energy price guarantee U-turn, with gas priced at £2,286.70 and electricity at £2,060.99.

Cornwall Insight said that things could ease slightly in the quarter from July to September 2023, with an estimated average annual bill of £3,697. 

How is the energy price guarantee being financed?

A woman with a smart meter

Credit: Getty

The scheme will be paid for by an increase in government borrowing, after Truss decided against a windfall tax on energy companies – though that could still change; Hunt refused to rule out such a measure yesterday, telling parliament that “nothing is off the table.” 

Energy suppliers have agreed on the fixed price in return for the government promising they can cover the difference between the cap and the wholesale price of energy with a Treasury-backed loan. However, the price of borrowing has soared recently in response to Kwarteng’s mini-budget, which was packed with tax cuts (the majority of which have since been rolled back). 

What are the potential advantages?

It’s hoped that introducing a price freeze this autumn will give the government more time to make broader changes to the energy market, such as introducing pricing models that take into account cheaper and more environmentally friendly renewable energy sources, but after a chaotic few weeks for the economy, there hasn’t been an announcement on this score yet.

And what are the downsides?

The price freeze will halt that terrifying 80% October price rise announced by Ofgem last month, but it still marks a huge increase from last year’s energy costs, and the energy companies will still be guaranteed to profit. Before the initial announcement, Ofgem’s price cap was set at £1,971 annually for the average household, while this time last year it was at £1,277 – an increase of around 54%.

Consumers could end up paying in the long run, with a levy on bills for at least the next decade. If the freeze is funded in the future by a fixed surcharge on all bills, that would mean that lower earners who spend less on utilities would be harder hit too (as proportionally, the surcharge would account for much more of their bill than that of a higher spender).

Until April, the current plan will be of greater benefit to wealthy people living in large homes, who tend to be the highest consumers of energy, rather than those on low incomes who are more likely to be concerned about the rising price of energy (though they might spend proportionally more of their household budget on bills, the actual sums spent are lower, so the savings as a result of the freeze will be less).

When will we know more?

We will have to wait until the Treasury’s review into the price cap to learn more about the plans for next year. We’ll keep you updated when new details are in.


Images: Getty

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