Back in October, the Government put in place energy subsidies for households and businesses, designed to protect them from the impact of high energy prices. For households, the intention was to reduce the number of people that would be forced into fuel poverty by prices that would have been multiples of the prices seen last winter, and for businesses, it was to reduce the number of business closures and the inflationary impact of high energy costs.
Given the short amount of time available for the implementation of these schemes, they were broadly universal in nature with most households and businesses qualifying for some level of support. Inevitably that made the schemes extremely expensive for the Treasury which has been funding the cost through a combination of higher taxes (such as the windfall taxes on excess energy profits) and increased borrowing, which will have to be repaid eventually by taxpayers.
Energy Price Guarantee subsidy reduced but prices may be lower
The Energy Price Guarantee (“EPG”) for domestic consumers has capped their bills at an equivalent of £2,500 /year for a dual fuel customer with a typical consumption level (the cap is applied to the unit rates of gas and electricity so using more, as with the price cap, means that the bill will be higher). This cap expires on 31 March when it will be replaced with a new support level at £3,000 /year on average. The Guarantee will continue to be universal, meaning that it will not be means tested in any way.
However, recent drops in wholesale gas and electricity prices could see the price cap fall below the EPG later this year, according to new forecasts from Cornwall Insight, limiting the impact of the reduced subsidy on households. Unfortunately, these levels are still unaffordable for many. Several market participants have warned in recent weeks that energy prices are unlikely to fall back to the levels seen before the rises of September 2021, saying that energy will remain expensive due to the costs of the energy transition.
“Estimates show that the energy crisis had pushed over 6.7 million UK households into fuel poverty, up from 4 million in October 2021. In April 2023, as the Energy Price Guarantee rises to £3,000/year for the typical household and the Energy Bills Support Scheme drops away, this will rise to 8.4m fuel poor households across the UK,”
– National Energy Action, Age UK, Scope, Fair by Design, and Energy Action Scotland
This is leading to growing calls for the introduction of a social energy tariff to replace the price cap and direct more support to those in fuel poverty. Last week a group of 95 charities wrote to the Chancellor raising concerns about energy prices and asking the Government to consider a social tariff, funded by taxation or through the bills of those who are more easily able to afford higher prices:
“…we urge your department to consider…a targeted support mechanism in the form of a social tariff for the energy market – a discounted, targeted tariff aimed at those in greatest need to ensure they are able to live in their homes comfortably. We urge you to consider a progressive funding mechanism which ensures those missing out on the social tariff do not have to bear its costs,”
– National Energy Action, Age UK, Scope, Fair by Design, and Energy Action Scotland
The Treasury has indicated that it is working with industry and consumer groups on measures to support consumers, including the possibility of a social tariff, but that no decisions have yet been made.
Energy Bill Relief for businesses is scaled back
The current Energy Bill Relief Scheme which will remain in place until 31 March provides a discount on wholesale gas and electricity prices for all non-domestic consumers, including public sector organisations, voluntary sector organisations such as charities, as well as businesses. This will now be replaced by a new scheme for a further 12 months which will have a cost cap set at £5.5 billion based on estimated volumes, compared with the £18 billion cost of providing support through Winter 2022/23.
“The extension to the scheme will provide respite for many firms at the start of the year and help them plan ahead for the next 12 months with more certainty. It’s unrealistic to think the scheme could stay affordable in its current form, but some firms will undoubtedly still find the going hard…Heavy energy users and those exposed to global trade are among some of the most impacted in the current crisis, so the additional support for these firms is a particularly welcome step,”
– Tom Thackray, director for decarbonisation policy at the CBI
This new scheme will be available to entities on a non-domestic contract including who are:
- on existing fixed price contracts that were agreed on or after 1 December 2021
- signing new fixed price contracts
- on deemed / out of contract or standard variable tariffs
- on flexible purchase or similar contracts
- on variable ‘Day Ahead Index’ (DAI) tariffs (Northern Ireland scheme only)
As with the current scheme, the Government will provide a discount on gas and electricity unit prices, subject to a maximum discount. A relative discount will be applied if wholesale prices are above a certain price threshold. For most non-domestic energy users these maximum discounts have been set at:
- electricity: £19.61 /MWh with a price threshold of £302 /MWh
- gas: £6.97 /MWh with a price threshold of £107 /MWh
The discount is calculated as the difference between the wholesale price component of the energy contract the business has with its supplier, and the price threshold. It is phased in when the wholesale price exceeds the floor price, until the total discount reaches the maximum discount for that fuel.
Energy and Trade Intensive Industries (“ETIIs”) who are particularly vulnerable to higher energy costs and who may find it difficult to compete with businesses elsewhere facing lower energy costs will receive a higher level of support, also subject to a maximum discount which for these sectors will be:
- electricity: £89 /MWh with a price threshold of £185 /MWh
- gas: £40 /MWh with a price threshold of £99 /MWh
As with the original scheme, suppliers will automatically include reductions to the bills of all eligible non-domestic customers, however ETII customers will have to apply for the higher level of support. The Government will then compensate suppliers for the discount they are passing on to these customers.
Although wholesale pries have fallen recently, they have ticked up again in the past few days with the colder weather. As I said in my previous post, I think it is still too early to be confident of lower prices next winter – the price cap may well out-turn higher than the EPG, and after more than a year of high bills, consumers could find the subsidised level even harder to afford. Life will also continue to be difficult for businesses, however the cost of subsidising energy is very expensive and at some point the bill will fall due.
The Government still doesn’t seem to understand that we live in an energy based economy, not a monetary one.
The vast majority of households just will not be able to afford to transition to electric cars and heat pumps without arise in their incomes.
But the is the thing there can be no rise in their incomes without economic growth and there can be no real economic growth without cheap energy.
Kier Starmer says there be no more investment in oil when he gets into power so he clearly does not understand that fossil fuels still have a major role to play.
We eventually did have to transition, but my other concern is the supply chain for the rate Earth metals that are needed for windmills, electric car motors and batteries.
Now there are major developments going on in battery technology and electric motors but they are still around a decade in the future.
I personally don’t think that we will see our economy stabilise for another 8 to 10 years and even longer than that for many households to be lifted out of energy poverty.
Both Labour’s and the Conservative’s energy policies have been appalling for the last 25 years with a lack of investment in nuclear energy.
So here we are in a situation where millions of households will have to get used to cold homes and a lack of personal transport.
It’s worse than that…poliicians believe that renewable energy will make energy cheaper. They confuse wholesale and retail prices and fail to understand that while wholesale prices can be affected quite quickly by renewables, it will take a very long time for retail prices to benefit due to the need to pay the high capital costs of both the generation and network infrastructure and the higher balancing costs including capital costs of assets needed to back up renewables.It is this mis-understanding more than any other which is driving the pace of change polititcians want to see…they really seem to believe people will be financially better off in the pursuit of net zero and while I might buy an argument that once we get there things could be cheaper, along the way they will get a lot more expensive.
Hi apologies if you’ve already seen this – you may have to copy the link.
The document just shows how impossible the target of 2050 is and how much damage it will do to poorer households.
As a domestic customer for over 45 years, the problem is amplified, in part, because we have become used to very low energy prices in the 10 years prior to this crisis. Many people were blasé about how they used energy and, for example, could spend more money on holidays, cars, new furniture etc. Frankly, that’s what I did.
Is there a solution to the current problem? The very poor must be protected, but everyone must be incentived to save energy in the long term. Looking at an eventual carbon free energy supply from, in the UK, wind, nuclear and storage, it is clear that the cost will be higher than it was before the crisis when gas and oil were predominant. There will have to be massive investment to achieve this goal and we, as energy users will have to pay the cost.
I think this is true not just in energy. People also got used to cheap credit and we have a culture now where people want more for less (including less effort) and it doesn’t occur to them that they can’t actually afford that Sky subscription or holiday unless they earn more. So they get into debt and into trouble paying basic bills because they believe they have a right to “nice” things. It’s a really damaging trend and we need a much more back to basics approach where people are taught (in school especially) about budgeting and what happens if you get into debt.
Energy IS cheap. And without that (cheap energy) everything is at risk. Even if you are a vegan, non-binary brainwashed tool. The Gov has had its nose deep in that trough for decades, and ALL the markets are distorted. This is the main risk of centralised control. We are close to the edge of that particular cliff and going over will be a collective (if un-educated) decision and possible a one way trip. I for one am making my own plans….
I see that BEIS are hoping to acquire 5.8GW in the T-1 Capacity Market auction next month. That is surely a tacit admission that they will have to keep coal plant available and ensure that windfall taxes don’t lead to early nuclear closure. It also implies another very tight winter for dispatchable capacity.
Indeed. RATS has already agreed not to close the unit that’s currently in reserve and to put it back into the market with the other 3 units. Not heard about Drax, but I’m sure you know my view that both should stay open as long as they can to try to bridge the gap to HPC. I haven’t looked at the T-1 register recently but last year there was a shortfall because BEIS set the target at the entire pre-qualified capacity and some assets pulled out over delivery concerns since many were unbuilt.
I fully agree on nuclear – including nuclear in the windfall tax was really stupid considering 2 of them are set to close in March 24 and any decisions on extensions would be (a) marginal and (b) need to happen soon so the fuelling can be managed.
Im not sure RATS has ever been run upto full capacity over last 12mths and W.Burton and DRAX may have been warmed up a couple of times but not used. This suggests ether they are too expensive compared to gas or more likely i guess is they will only use them as a last resort for political reasons. So you have to wonder whether its worth paying to keep them available but if more nuclear goes as planned then they need to be retained. Gas on the other hand has been run upto close full capacity in several half hours although there are some sets embedded as well which don’t show up so given what the gas price has been its surprising coal hasn’t been able to outbid at least some of the sets.
RATS has been running pretty consistently. Probably not at full load, but there have been plenty of overnight runs as well as daytime. We’ve had close to 1 GW running pretty consistently over the past day (looking at LCP Enact so it might be longer, it’s just a one-day snapshot).
WB is definately just a reserve. 2 units are already dismantled and the other 2 being held together by a wish and a prayer for the winter. I think EDF has done a great job keeping them on for reserve since the staff had been let go ready for decom. Drax is another story…it’s a much newer plant and its 2 remaining coal units could keep going longer. I think all of Drax should go back to coal anyway, it would be MUCH cleaner, but that’s a whole other story!
We definitely could do with more gas though. Re-opening the Calon CCGTs and building a few more would be ideal to secure electricity supplies. And if NG ESO is worried about access to gas then the distillate supply chains should be refreshed for those CCGTs that can dual-fuel. There’s a lot that could be done, but sadly very little actually is…
The idea that a Social Energy Tariff could in any way form a just or reasonable answer to this problem is at best irresponsible but really quite stupid as an attempt to help..
We already have a hopelessly generous benefits and allocations system where it has been been reported recently that over 50% of the population are net gainers from government hand outs over taxation. I’m not sure if this includes the energy payments.
The problems of high gas prices lie at the feet of extremely bad government action. The choking unaffordable tax burden lies at the feet of excessive government action. The calling from NGOs, whose only reason for existing is to scream at government for greater dependency for all, lies at the feet of government panic action over prudence. Those NGOs have about as much credibility in solving any problems as striking workers and Climate Change activists.
The energy companies and the international markets could easily solve this problem, yes easily. However they are hampered as usual by the stupidity of international politics and politicians and their collective rush to greater depths of creative rational nonsense.
I think that’s a bit harsh. A Social Tariff would replace the price cap, and WHD and would deliver targeted support to people in fuel poverty, thousands of who DIE every winter becuase they cannot afford to heat their homes. Last year that figure was 8,500 people. A pensioner in Manchester actually died from direct hypothermia in December and her death has been the subject of an inquest.
Nor can the Government do very much about high international gas prices, and unless we were self sufficient in gas, we could not avoid exposure to those prices. I’m not sure how energy companies or “international markets” can quickly or easily solve the problem of a supply/demand imbalance that has resulted from the removal of Russian gas from the market unless you think we should simply allow Russia to invade other countries without consequence.
I agree that help should be targeted at the poor
Yes, and governments and the energy companies have proved themselves wanton in doing this. People die despite our massive, very expensive for all, interventions it seems and loads of NGO’s carp at government in response
I think targetted support for those in so called fuel poverty is much more complicated than political intervention in the energy markets. A Social Tariff or indeed and other form of political, market or chatitable intervention is unlikely to be in itself the answer. The fact that people currently die of hypothermia in places like Britain that already has excessive in my view interventions points to evidence of this.
Taking Russian gas out of the home markets by political sanctions for much wider considerations than energy supply is a critical political intervention into gas markets. Without this intervention the prices would not have risen in the way they have.
There is plenty of gas in the world. The technology to deliver it is awesome and wonderful. The only obstacles to this are political.
The political initiatives that seek to replace cheap and efficient systems with expensive unreliable systems are plain for all to see and I belive not acceptable as things stand.
I stick with my points that markets, or human action and work should never be impeded in the ways that they currently are being.
The so called Russian Invasion is part of the political consideration. Our response to it is hurting us and vulnerable people and not the Russians it seems.
I long for political leadership in the West if you like that seeks to resolve this issue with proper negotiations and understanding.