Making social science accessible

17 Mar 2023

The Chancellor has announced in the 2023 Spring Budget that the energy bill support scheme will continue until June.

This explainer sets out why energy prices have been so high and how the government has responded so far.

Why have energy prices been so high?

In 2022, energy prices dramatically increased for households and businesses. In October 2021, the energy price cap, which sets the maximum price per unit households can pay for their energy, was the equivalent of £1,277 a year for a household with typical fuel usage. By October 2022, it was £3,459, and by January 2023 it was £4,279.

This was a result of rising wholesale costs (the price at which energy suppliers procure gas and electricity), which were then passed on to consumers.

Wholesale energy prices were already well above historic averages from mid-2021 because of the surge in global demand when economies opened up from lockdown as well as supply issues relating to gas supply both from the Russian and the UK side.

Russia’s invasion of Ukraine then caused prices to increase even further in 2022 as Russia reduced its gas supply to European countries.

Although the EU has been much more dependent on Russian gas imports than the UK (imports from Russia only made up 4% of the total UK gas supply in 2021 compared to 40% for EU countries), the significant disruption this caused to global energy markets (in terms of reduced supply) has meant that gas prices have increased sharply all over the world so the UK has been unable to escape the impact.

Energy crisis

The UK has been particularly badly hit as it is highly dependent on gas for heating homes (gas heats 85% of UK homes compared to less than 50% in France and Germany) and for electricity (around 40% of UK electricity is produced from gas compared to 15% in Germany and 6% in Denmark). According to the IMF, the average UK household was estimated to have lost 8.3% of its total spending power (the most in all of western Europe) due to rising energy bills.

How has the UK government supported households?

In February 2022, the Chancellor announced the Energy Bills Rebate, which gave 28 million households a £200 discount off their energy bills, which they would have to repay over five years from 2023. An additional £150 rebate was granted to households in council tax bands A-D.

“In the 2023 Spring Budget, it was announced that the EPG would hold the cap at £2,500 for households for another three months”

In May, the government announced a £15bn package of targeted government support, which included a one-off £650 cash payment to over 8 million low-income households. In addition, this package scrapped the Energy Bills Rebate and replaced it with the Energy Bills Support Scheme (EBSS), a £400 rebate, with no repayment obligation, given to all UK households to help with their energy bills over the winter (October 2022-March 2023).

Since October 2022, the government has increased support to households through the Energy Price Guarantee (EPG).

The EPG does not cap the maximum energy bill, but rather caps the amount that households pay per unit of gas or electricity for two years from October 2022, meaning that a typical household in the UK will pay £2,500 per year.

This is not the same as the default tariff cap (commonly called the energy price cap), which is set by the energy regulator Ofgem, limiting what energy companies can charge customers per unit while still allowing them some profit. Because the EPG is lower than the default tariff cap (which stood at £3,459 for a typical household in October 2022), the government has been paying the difference to energy companies.

What support will households get from April?

In the Chancellor’s Autumn 2022 statement, it was announced that the Energy Price Guarantee would remain in place until April 2024 but from the end of March it would provide less protection to households, with the average household energy prices rising to £3,000 per year- meaning an expected increase of more than £500 to be shifted onto customers.

However, in the 2023 Spring Budget, it was announced that the EPG would hold the cap at £2,500 for households for another three months, and the planned increase to £3,000 would instead be implemented on 1 July.

Households will also no longer benefit from the Energy Bills Support Scheme, which will end as planned in March 2023.

This will be replaced by more targeted support for particular groups to help with energy costs:

  • households on means-tested benefits will receive £900 over three instalments in spring, autumn and spring 2024;
  • pensioners will receive £300 in the winter in addition to the winter fuel allowance they receive every year;
  • and people who receive certain disability benefits will receive a one-off £150 payment in September.

Energy is regulated separately in Northern Ireland, where bills will be held at £1,950 per year for an average household.

What about people on prepayment meters?

For those on traditional prepayment metres the discount from the EPG is deducted automatically by capping the rate that customers pay for each unit of electricity and gas.

In contrast, the EBSS is handed out to those on prepayment meters through redeemable vouchers of £66 per month, while for other energy users the money is automatically paid into their bank or energy account.

It has been reported that 24% of these energy vouchers had still not been claimed by February 2023. This has led to various charities and consumer groups calling on the government and energy firms to raise awareness of the scheme and ensure that people redeem their vouchers.

Why has the government decided to maintain the guarantee at current levels?

The energy support packages are expensive to maintain, with the Resolution Foundation estimating the cost to government at £16bn from January-March 2023. In addition, the government has previously expressed concerns that energy prices could suddenly rise, which would drastically increase the amount that it would be committed to spending on subsidies.

Increasing the EPG threshold would thus reduce the level of government subsidy. However, due to falling wholesale gas prices (which have dropped by more than 70% since August 2022), the default tariff cap set by Ofgem has decreased, with the average yearly household bill set to drop down to £3,280 in April, from £4,759 in January. This means the government will have to pay significantly less to make up the difference between its own £2,500 price cap and that set by Ofgem.

“Falling energy prices and the increasing confidence that they are becoming less volatile appears to have been a key factor in the government deciding to keep the cap at £2,500”

The total cost of the EPG from April to June is expected to be £4bn, which is a significant reduction from the EPG cost for January-March 2023 but will cost £2.6bn more than if the EPG had risen to £3,000 for this period.

The falling energy prices and the increasing confidence that they are becoming less volatile appears to have been a key factor in the government deciding to keep the cap at £2,500, with Cornwall Insight estimating the Ofgem energy price cap will fall to £2,153 in July and remain close to that level for the rest of 2023.

Moreover, over 100 organisations called on the government to keep the £2,500 price cap, on the grounds that raising it to £3,000 would push the number of people in fuel poverty (meaning they cannot afford to properly heat their homes) up from 6.7m to 8.4m.

 

Chart showing that the government has committed to extending its energy price cap at current levels until June (the Energy Price Guarantee caps the average household bill at around £2,500).

What about help for businesses?

The government also committed to supporting businesses and public sector organisations (e.g. schools and hospitals) with their energy costs from October 2022 until the end of March 2023 through Energy Bill Relief Scheme (EBRS), which provided a cap on electricity and gas prices per megawatt hour.

A new Energy Bills Discount Scheme (EBDS) will replace it from April 2023 to April 2024, providing up to £5.5bn to support businesses and charities. Rather than the previous cap on per unit energy prices, this scheme offers discounts to businesses on their electricity and gas bills when wholesale prices are above a certain cost.

This new scheme is a significant scale-back from the previous one, as the estimated costs for the new scheme are hardly a seventh (on a per-month basis) of the £18bn the government spent on the previous scheme.

Energy subsidy

Many businesses claim they will no longer receive any support when the current EBRS scheme ends in March and will face a 70-80% increase in their power and gas bills. This is due to the fact that wholesale energy prices are currently below the level which would qualify businesses to receive government support, forcing them to pay current market rates in full. Yet some businesses are in an even worse position as they are locked into fixed-cost contracts that were agreed last year when prices were significantly higher, and will, therefore, be paying significantly higher rates without support.

As a result, the Federation of Small Businesses Lobby Group suggest that one in four small businesses will have to close, downsize of restructure their operations due to this cut in subsidies. UKHospitality has claimed that this cut will do significant damage to the hospitality sector, costing it at least £4.5bn over the 12 months of the new scheme.

However, the government has increased support for some sectors. On 23 February, the government announced the British Industry Supercharger scheme, which will give extra support to ‘energy intensive industries’ – sectors particularly exposed to high electricity costs.

The scheme will reduce electricity costs for 300 companies, employing 400,000 workers, in steel, metals, chemicals and paper manufacturing sectors by giving them exemptions on renewable energy obligations.

It is hoped that this will increase the competitiveness of British manufacturers in these sectors, which have faced higher industrial electricity costs than many of their European competitors.

“Despite the EU’s more active effort to reduce gas and electricity demand, overall figures do not show a large disparity between EU and UK consumption.”

Other sectors outside manufacturing are also designated as ‘energy intensive’ and, therefore, qualify for the extra support. These include: voluntary sector organisations, such as charities; public sector organisations such as schools, hospitals and care homes; and some facilities in the culture sector, such as libraries, museums, and nature reserve activities.

Leisure centres and swimming pools do not currently qualify for this extra support. As a result, there is some concern that many of these facilities will be at risk of reduced hours or closure.

How does this compare to support in the EU?

Since the energy crisis in September 2021, in terms of raw allocated funds, the UK has spent the equivalent of €103bn to support consumers from rising energy prices, more than any EU country apart from Germany (€265bn).

However, when support is measured by allocation per capita the UK falls much closer to average EU support levels.

 

Chart showing the UK is closer to the middle of the pack when support for energy bills is measured per capita.

 

In terms of specific support measures, the UK has adopted similar measures to most EU countries: subsidising consumer and business energy bills; reducing energy tax; and increasing taxes on windfall profits of national energy producers.

However, there have been some differences in approach.

While the UK and most countries in the EU have focused on regulating retail prices from suppliers, five member states have enacted measures to regulate wholesale energy prices. For example, France has forced EDF, which it has now renationalised, to sell some of the electricity it generates to smaller competitors at a cut price in order to limit the rises in electricity prices for households.

Another noticeable divergence has been attempts to keep energy prices down by reducing energy and gas consumption.

Last year, EU member states agreed to reduce their countries’ demand for gas by 15% and electricity by 10%. Some countries have offered households energy price cuts if they reduce their electricity use; however, the EU targets were mostly voluntary and many member states have still not adopted any gas or electricity reduction measures.

Meanwhile, the UK has not yet introduced measures to cut gas or energy use but did launch an Energy Efficiency Taskforce in the Treasury’s Autumn 2022 statement, which aims to cut energy consumption from buildings and industry by 15% over the next seven years.

The EU has also recently made a more ambitious commitment to limit energy consumption through the Energy Efficiency Directive, announced in March 2023, which will make energy savings of 11.7% by 2030 (which is a 1.49% reduction in energy usage per year) mandatory for member states.

Nevertheless, despite the EU’s more active effort to reduce gas and electricity demand, overall figures do not show a large disparity between EU and UK consumption. The EU was able to reduce natural gas demand by 12% in 2022 from its 2019-22 average, compared to 9% in the UK. While the EU’s electricity consumption fell  by 3.5% in 2022 from the previous year, compared to 5% in the UK.

By Peter Jurkovic, researcher, UK in a Changing Europe.

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