Price cap down, bills up anyway. Welcome to the complexities of today’s energy market. Until the cap takes another lurch downwards – expected to happen from July when the backward-looking formula fully catches up with lower wholesale gas prices – the relevant measure for most households remains the government’s “energy price guarantee”, or EPG.
On current plans, the EPG will rise from £2,500 to £3,000 in April; and critically, the universal £400 subsidies will be yanked away at the same time. So, even if one can confidently predict some relief in bills from mid-summer, the next leg of the energy crisis will be harder than the last. In the circumstances, the calls from the campaigner Martin Lewis and many others for an extension to the support scheme are compelling.
It is estimated that extending the £2,500 threshold for three months would cost the government another £2.6bn, which is a tweak in the context of the cost of the EPG scheme so far. And it would be the right thing to do. One hopes the spectacle of BP’s board pondering whether to give its chief executive a full £11.4m bonus, or ask him to rub along on, say, £10m, will usefully crank up the political pressure.
But there is also a wider issue here – one highlighted by Jonathan Brearley, the chief executive of Ofgem, as he announced the latest price news on Monday. “We also think that, with bills continuing to be so high, there is a case for examining with urgency the feasibility of a social tariff for customers in the most vulnerable situations,” he said.
You bet there is a case. Even the lower projections for the next couple of price caps will not feel remotely comfortable for those at the bottom end of the income spectrum. The consultancy Cornwall Insight forecasts £2,153 and £2,161 for the July and October quarters, which would still be a considerable distance from levels we used to consider normal. This time last year the price cap was £1,277.
In a rational world, the EPG would have been targeted at the most vulnerable from the outset. The catch-all design flowed from the need to act quickly, plus the daunting size of the problems at the time (even middle earners would have been clobbered by unmitigated market prices). The fact that the EPG knocked a few percentage points off general inflation was an incidental benefit. But, if the EPG is now set to fade to nothing for practical purposes, the lower end of earners should not be left adrift. Average bills are still likely to settle at £2,000-plus, which is a material change.
The inescapable point is that there was always a set of households for whom energy bills were unaffordable. That was true even before prices spiked with Russia’s invasion of Ukraine, which is why schemes such as the warm homes discount exist. But the definition of “unaffordability” has expanded. Policy needs to recognise the new realities that the market is more volatile and prices are highly unlikely to return to their old levels soon.
A social tariff – a discounted rate for defined groups – is not straightforward to design. Establishing a set of “vulnerable” customers requires making cliff-edge judgments. A perfect model would also recognise that energy bills for households of equal income can vary hugely according to quality of insulation. It ain’t simple.
But the emerging consensus among those who thought about the practicalities runs roughly like this. The benefits system would be used as the easiest marker of “vulnerability”. Since the cost of a social tariff would probably be too great to be shoved on to other bill-payers, funding would have to come through general taxation. That means the government, not the energy companies, would have to take charge of administration (unlike with the warm homes scheme). And local authorities would need an extra pot of money to plug inevitable gaps.
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That’s a sketch of a model. Others are available and, indeed, the government is exploring a few options. The missing ingredient – so far – is the political will to make it happen. This ought to be the moment to get off the treadmill of emergency interventions, temporary fixes and 11th-hour lobbying. Get a proper social tariff in place, as applies in many other European countries. And Brearley is right about the need for the work to happen “with urgency”. Ministers should get on with it.
