On Monday, Ofgem is expected to announce the latest energy price cap.
Martin Lewis has provided an explanation on the impact of the upcoming energy price cap announcement on household bills. Despite an anticipated decrease in Ofgem’s price cap, analysts predict that energy bills will increase by an average of £500 annually. Ofgem is expected to announce a drop in the cap by approximately £1,000 to £3,295, effective April 1, according to the forecast from Cornwall Insight.
Nevertheless, customers will pay roughly 20% more on their bills as the Energy Price Guarantee, which provides additional government support, will be terminated from April. Lewis shared his insight on the matter through a series of tweets.
He has called on the government to delay the planned increase in energy bills until July.
Martin explained: “The energy price cap (Cap) is set by Ofgem based on wholesale rates – those energy retailers pay. Until Oct 2022 solely it dictated the max standing charge & unit rates firms could levy. And as in recent times all firms charge near-enough the max, it set the price we paid.
“Then in Oct, the Govt introduced the Energy Price Guarantee (EPG), set to last til April 24, which means if the Cap is very high (as it is) the govt reduces what we pay, by subsidising it. Yet the rule is, if the Cap drops below the EPG, we will then pay the lower amount. In Apr, the govt plans to increase what we pay under the EPG by 20% And while wholesale prices have dropped a lot, as the Cap’s time lagged, tho the April Cap will drop, it’ll almost certainly still be above the EPG. So bills (eng, scot, Wales) will still rise avg 20%.
“Yet its very likely from July, the Cap will be lower than the EPG at its current level (never mind if it rises 20%) so from that point, unless wholesale prices rocket again the EPG will be irrelevant and we will go back to paying the lower Cap price. Which is why it seems especially futile to subject people to the financial and mental health damage of a 20% rise for three months, especially as the EPG will cost many £bns less than originally thought.”
He concluded: “NB The one impact of the April price Cap change is while the overall level is based on the EPG, the cap can change the balance of cost between – DD and prepay & pay in receipt of bills – The (already too high) standing charge & unit rates. We’ll be monitoring this.
“PS the letter I wrote to the Chancellor, which you can see in my past tweets, and is now supported by nearly 80 major charities, asks him to postpone the EPG rise until July. Which as you’ll understand from the above likely means the rise will never hit bills in practice.”
Starting in October, the government launched an energy rebate scheme worth £400 that provides six monthly payments of £66 and £67 to support households with energy costs. Currently, the energy price cap set by Ofgem is £4,279 per year for an average household, which implies that the government might have paid an average of £1,779 per year to energy suppliers for each household they serve between September and March.
The expected drop of the Ofgem price cap to £3,295 and the increase in the energy price guarantee level to £3,000 means that the Government will only be paying £295 per household annually from April to June. Cornwall Insight predicts that the price cap will decrease even further to £2,153 in July, and then reach £2,161 from October onwards.
The expected lower price cap will result in reduced bills for customers and a decrease in the Government’s contribution to the bill to zero, as it will be well below the price guarantee level. However, the bills will still be around twice the amount of the price cap before the energy crisis.