Myth-busting the energy price guarantee

Now that the dust has settled over Liz Truss’ recent energy crisis announcement, we’ve put together a round up of the facts and figures, to give you a sense of the highlights from her announcement, what this support will look like in reality and what questions remain unanswered.

On 17th October, new Chancellor Jeremy Hunt announced that the current energy price guarantee (which caps electricity prices at 34p per unit and gas at 10.3p per unit) would no longer be running for two years as previously announced. Instead, this support will come to an end in April, when a review will be undertaken. Currently, it looks like targeted support for the ‘most vulnerable’ will continue, but right now we don’t know what that will look like.

In case you don’t have time to take it all in, here are the headlines:

• The energy price guarantee is another name for energy price cap. If you use more than £2,500 worth of energy a year, you’ll pay for more.
• Consumers on a fixed tariff will get a discount on their unit price, but if you’ve fixed high above the new energy price guarantee you might end up paying more.
• It’s still unclear as to how support for those who don’t get their energy via the grid (or who get their energy via a shared supply) will receive support, but an equivalent package is being offered (likely via a special fund).
• The cost-of-living package promised earlier in May is stil going ahead. Can’t remember what’s included in the package? Check out our handy guide.
• The energy price guarantee isn’t targeted, which means that everyone will get the same level of support regardless of their income. The End Fuel Poverty Coalition have estimated that 16.4 million people will be living in fuel poverty this winter.

First things first, this is still a price cap

As Shakespeare famously noted, a rose by any other name would smell as sweet. It’s not as romantic or inspiring, but we want to make sure the message gets out there that a price cap by any other name is still a price cap. Calling the latest cap an ‘energy price guarantee’ (rather than sticking with the term price cap) means that there may be some confusion amongst members of the public, who might even start to think that it’s impossible for them to pay more than £2,500 this winter.

This is not the case. The £2,500 announced by the Prime Minister is essentially an artificially lowered price cap. What this means in practice is that if you use more than £2,500 of energy over the year, you’ll pay more. Equally, if you use less than £2,500 of energy over the year, you’ll pay less. It’s also important to remember that the price cap is not on the annual cost of your energy, it’s on the individual unit price (which is a different price for gas and electricity). From 1 October, the new price cap figures are:

The UK Government is borrowing a large sum of money (somewhere in the region of £140 billion) to offset the ‘loss’ that energy companies will make by providing households with a lower unit price for their energy than the previous figure (which is dictated by the wholesale price of energy). The best way to think of your energy is in unit terms. So, for every appliance you use (whether that’s a TV, your fridge freezer, gas central heating or your hot water), you’ll be using energy in unit amounts.

For example, a 9kW shower that’s on for ten minutes will use 1.5kWh of energy. Under the new ‘price guarantee’ of 34p per unit, this ten minute shower will cost 51p, as it’s using one and a half units of energy. All the units you use across your home will add up to make your monthly bill (or reduce the amount of money you have on your prepayment meter).

This is why it’s still possible for you to pay more than £2,500 a year for your energy. The £2,500 figure is used to give people some understanding of what the AVERAGE bill could look like for a TYPICAL household in the UK, so that if you’ve never really thought about your energy use before, you’ll still have some idea of what an average bill might look like. But because it’s the unit price that adds up, you’ll simply pay for the total amount of units you use over the year, which could add up to more or less than £2,500.

This price guarantee will remain in place for the next two years, based on the assumption that uncertainty in the global energy market will continue for the foreseeable future, making continued increases to energy prices likely without intervention.

Think about your energy like a game of Tetris. Each unit (or piece of the puzzle) adds up to make the whole (your bill). 

Do I need to contact my supplier? How is this going to work?

First of all, you don’t need to contact your energy supplier. As this guarantee is being applied to the unit price, it will be automatically applied when your bill is calculated. If you’re on a prepayment meter, the guarantee will also be applied to the unit price, so when you top up the amount you put on the meter will last for longer than it would have without the guarantee. The amount per unit is still going up, so your energy will run out sooner than it currently does.

What if I’m on a fixed rate tariff?

Some people will be on a fixed rate that dates from before the energy crisis, whilst others might have made the choice to go for a fixed rate in the last couple of months, preferring to know what they would be paying amidst the chaos of the crisis. The UK Government will be bringing in a ‘floor’ unit price for gas and electricity, averaging at the same price that standard variable (or flexible) tariff customers will be paying (which is the 34p and 10.3p figures referenced above).

Anyone who is on a fixed rate tariff that is already below the new energy price guarantee level (or new floor unit price) will stay on this lower rate, but will not receive a further reduction. For anyone who fixed at a rate that was higher than the previous October price cap figure (averaged at an annual bill of £3,549), a discount of 17p per kWh for electricity and 4.2p per kWh for gas will be applied. When the higher starting point is taken into account, this means that for anyone who fixed at a higher rate, their bill is likely to be above the new energy price guarantee rate. As with customers on flexible or standard variable tariffs, energy suppliers will adjust fixed tariffs automatically.

Support for non-traditional energy mentioned, but the details remain unclear

Equivalent support is being offered to households that are not connected to the mains grid (for example those who use LPG or oil). This support will be provided via a discretionary fund, the details of which remain unclear. The same is true for households that aren’t supplied by conventional gas or electric contracts (for example park homes or households on a heat exchange). Again, the details of how this discretionary fund will work haven’t been made public at this point.

As far as those households who pay for energy as part of their rent (such as students or some tenants in houses in multiple occupation), things get a little complicated. If you pay for your energy as part of your rent, you’re buying your energy from your landlord, who will have a contract with an energy supplier and who is essentially selling that supply onto you, the tenant. Your landlord could be reselling the electricity, depending on your usage. If this is the case, they must comply with the maximum resale price rules, which say they cannot make a profit and should be charging the same price that they have paid for it.

Alternatively, your landlord may charge all-inclusive rent where a fixed charge for energy is factored into the amount you pay every month. In these circumstances, landlords will receive the £400 discount as they technically pay the bill. The UK Government is encouraging landlords to come to an arrangement with tenants that reflects this discount and are apparently considering ways of ensuring this happens (including using emergency legislation), however at the moment it’s unclear as to how they will ensure this discount is passed from landlord to tenant. It is possible that your fixed arrangement with your landlord will provide you with some protection from price rises. For example, if you are renting a student property and have signed a 12-month contract that doesn’t reflect these price increases, you may be paying less than the energy price guarantee for your supply.

Measures are not targeted, which means millions will still fall into fuel poverty this year

The energy price guarantee is a blanket measure, meaning it will be applied to the bills of all UK domestic customers and isn’t based on any form of means testing or eligibility criteria. Whilst this is good news as far as the ease of rolling out support goes, what it means in reality is that those who are able to afford energy price increases will have their usage caped at the same price as those already living in fuel poverty. Analysis from the Resolution Foundation suggests that the support will likely benefit higher-income households more as they use more energy and will benefit more from the plans to scrap the rise in National Insurance.

The End Fuel Poverty Coalition have estimated that at the level of support provided by the energy price guarantee, 16.4 million people (which equates to 6.9 million households) will be living in fuel poverty this winter, which equates to roughly 25% of the total UK population. This is based on a fuel poverty calculation that places a household in fuel poverty if they spend more than 10% of their income on energy. These calculations include the £400 cost of living payment that will be deducted from energy bills each month, starting in October.

The whole cost-of-living package announced in May will be going ahead

There are no plans to change the package of support announced by previous Chancellor Rishi Sunak, and the package forms part of the current UK Government’s response to the crisis. We provided a roundup of the support back in May, including a breakdown of what level of support different types of household could expect. Along with the £400 monthly reduction to bills (split into instalments), those on means-tested benefits were promised a £650 payment paid in two instalments, the first of which has been distributed by the Department for Work and Pensions already. Pensioners who are in receipt of a winter fuel payment will still receive the promised £300 and people in receipt of non-means tested disability benefits will receive a payment of £150. These payments are all in addition to the £400 that everyone will receive.

If you’re struggling to keep up with rising energy prices, we’re here to help.

Speak to one of our energy advisors for advice on a range of energy topics. There is often grant funding available to help you make your home more energy efficient, including installing boilers, insulation and central or low-carbon heating.  If you live in Gloucestershire or South Gloucestershire, call us for free on 0800 500 3076. If you’re based in Herefordshire, our freephone number is 0800 677 1432.

If you’re struggling to manage or understand your bills – especially in the face of rising prices – and are worried what this year will hold, our Energy Advocates have your back. If you don’t know where to start and are battling with anxiety produced by your home energy, they will help you feel in control. If you live in Herefordshire, use this link to get in touch with the advocacy team in your area.