Government unveils Energy Price Guarantee

Date : 09 September 2022

The Government has announced the Energy Price Guarantee, which will limit the average annual household energy bill to £2,500 for two years. Businesses, charities and public sector organisations will be provided an equivalent level of support for six-months.

The Energy Price Guarantee means that annual average household bills will be well below the previously-announced cap of £3,549 per year. More significant savings for consumers will be felt in 2023. The latest analyst expectations were that the price cap would rise to £5,300 or more from January.

The Government will now be covering the large shortfall between supplier costs and household bills, as shown in the chart below.

Click chart to enlarge

Businesses are to be offered a similar level of support to households for a six-month period from October, after which the Government will provide ongoing support for vulnerable industries.

The support is expected to take the form of a fixed unit cost of energy, although the price of this has not yet been confirmed.

Throughout the six-month period the Government will carry out a series of reviews, ensuring that continued support after April is targeted to sectors of the economy that are most vulnerable. It is expected that the hospitality industry will qualify for this support.

The Government will look to secure the UK’s long-term energy supply by accelerating production of renewable and nuclear forms of energy. In addition, the moratorium on fracking for shale gas will be lifted alongside an announcement that new licenses for the North sea oil and gas will be granted.

The Government has also launched two reviews to deal with the underlying issues within the energy market to deal with supply and affordability and another to focus on the achieving Net-Zero by 2050.

IGD Viewpoint

This is a major financial commitment by the Government. Estimated figures are yet to be confirmed, but it is likely to cost upwards of £100bn. To compare, the furlough scheme at the height of the COVID pandemic cost around £70bn.

The Government has confirmed that this commitment will be financed through significant borrowing, which will have an impact on public finances. In June, public sector borrowing reached near record highs.

The Energy Price Guarantee is likely to have a significant beneficial impact on inflation - the Government expects the peak value for inflation to fall by around 4 percentage points (the latest Bank of England inflation forecast expected price rises to peak at 13.3% in Q4 2022).

Analysts have suggested that a support package of this scale may increase inflation in the long run, due to increased spending in the economy.

This may keep inflation above the Bank of England’s target of 2%. The Bank revealed that interest rates might need to rise higher than previously expected, in order to bring inflation back to target.

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