Martin Lewis: Energy price freeze rumours

What it means for you, will it work?

  • Energy companies met with the new Liz Truss administration yesterday, and it's widely assumed that top on the agenda was keeping the price ceiling at its present level (£1,971/yr for someone on normal use) and adding small businesses to the cap as well. This is similar to recommendations made by the major opposition parties, albeit it is likely to be funded differently.

  • Since then, we've heard murmurs that the maximum would be fixed at £2,500/year for someone with normal usage - but the £400 bill cut will still be applied, for a total of £2,100. Of course, most individuals aren't on usual use, but based on that data, it would imply a 6.5% increase in expenditure (slightly less for lesser users, more for higher users).

  • Since then, we've heard rumblings that the maximum would be fixed at £2,500/year for someone with normal usage - but the £400 bill cut will still apply, for a total of £2,100. Of course, most individuals aren't on normal use, but using that data as a guide, it'd represent a 6.5% increase in expenditure (slightly less for lesser users, more for greater users) compared to what you pay now, rather than the anticipated 80% increase in the ceiling.

  • The announcement is presumably coming on Thursday, so I thought it was worth hashing out a dozen preliminary ideas while the policy is being established (obviously, I'm making educated assumptions on some of it).

  • Millions of people require immediate assistance. The planned 80% energy price cap increase for 1 October in England, Scotland, and Wales is a disaster, and it's only going to get worse in January with another predicted 50% increase, bringing a typical bill to £5,400/yr (we're 7mths into the 10mth assessment period, so this figure is likely in the right ballpark).

  • Predictions after then are more difficult, but still extremely plausible, unless the situation in Ukraine is resolved or there is a global economic downturn.

  • Freezing (or near-freezing) the price ceiling now would be really beneficial. I have long and emphatically advocated for further government action. However, if I was asked, I was cautious to remain agnostic about the method utilized to assist, since my primary focus was ensuring that there was a desire to do something more.

  • Freezing the price ceiling at its current level surely does that, and I would welcome it wholeheartedly. It would go a long way toward mitigating additional short-term damage and the risk to health and mental health, allowing many to breathe a sigh of relief.

Yet we must accept doing it this way may turn out to be expensive for the public finances, and is certainly far from targeted.

  • The great advantage (and disadvantage) of this is that (nearly) everyone gets it. In previous meetings with Rishi Sunak when he was Chancellor, he recognized both realistically and politically that although it was necessary to focus aid on the poorest and most vulnerable, individuals on low to moderate incomes would feel unfairly left out. This is especially true now, with cost increases so significant that many middle-income earners may struggle to keep up. By (near) freezing the cap, you cast a broad net for assistance.

  • However, this implies that the benefit is available to all bill payers, even the rich (yes, like me). And those who benefit the most in terms of cash will be those with the highest bills (many, but not all, will be at higher income levels), indicating that it is plainly not aimed at assisting those who need it the most.
    PS: For Liz Truss, who has stated that 'handouts to individuals' are not something she supports, this arrangement is likely to be politically advantageous since she can claim it is not a 'handout,' but rather a cost-cutting measure.

  • What happens to those whose tariffs are fixed? Up to 15% of families have fixed tariffs, with many locking in at higher costs because they are risk adverse and want to safeguard their expenses. So, what happens next? Will they be automatically subjected to a price freeze?

  • Will they be able to switch to the price freeze if they are not automatically moved? Will they still be charged if their tariff contains early exit penalties (some of which can be £300 or more)? (Hopefully not, especially as it'd likely be an internal tariff adjustment and exit penalties are generally waived for things).

  • This must be addressed as a priority so that individuals who have attempted to protect themselves do not lose out. Of course, I would push for that, and I hope that some policymakers are reading this right now to guarantee that it gets handled.

  • If you fixed during the previous 14 days, check when the cooling off time finishes, because you may wish to cancel on Thursday when we hopefully know what's going on.
    PS: The political risk of policy shift has always existed (I mentioned it in my Should I Fix guide), but this may be a more drastic move than many thought. It's never been simple to decide whether or not to mend anything. That's one of the reasons I've always labelled the degree it's worth contemplating as 'crystal ball gazing,' with no way of knowing if it's the correct choice.

  • Some who have recently made the decision to repair may be disappointed by this. However, keep in mind that you made the decision based on the facts available at the time, and that's all you can do; it was a good decision for you based on what you knew, even if the outcome didn't turn out to be what you expected.

  • We're freezing at or above the present level, which is already rather high. If we freeze now, the price cap has already risen by 50%, therefore we are freezing at a high level (and higher than some other countries have). It would imply that this winter's bills would be around £2,000 (or £2,100 if the newest speculations are correct) for normal consumption, compared to £1,300 last year. This is a significant distinction for many people.

  • However, there is a balance to be struck here in terms of how much the government can do in the face of massive international cost spikes. In comparison to the current situation, when an average dreadful 150% increase is now expected over the next 12 months, this will be a significant expense reduction for individuals.

  • It has been suggested that energy companies will obtain a loan for 18 months to pay expenditures, which will subsequently be returned over a decade, but this is a risk. What if prices do not fall? The key suggestion (assuming it follows the lead of certain major energy retailers) is that they would take out huge commercial loans backed by a government guarantee to freeze costs immediately. They will still have to pay the present high wholesale rates to energy producers to acquire electricity, but after 18 months, when wholesale rates are expected to fall, they will be allowed to add a chunk to bills over 10 or more years to repay it.

  • But what happens if the bills don't fall? Energy price projections have consistently been understated by energy analysis organizations as they have risen. There is a chance that this will happen again. We can't add the 'energy business loan repayment' to bills if they remain high, so who pays and what happens?

  • It's worth emphasizing that some believe they won't accomplish it through a loan on bills, but rather by government borrowing from general revenues. We'll just have to wait and see.
    PS: The Rishi Sunak loan-not-loan program, which was later abandoned, was heavily criticized. If this is a loan, the structure will be considerably different - the loan here is to energy businesses, not individuals - though some of the effects would most likely be comparable. Those who do not pay bills now but do later when the cost of repayment is higher will lose, while those who pay now but do not later will benefit.

  • This might lower the rate of inflation, which would benefit UK debt expenses. I'm a consumer finance expert, not an economist, therefore this is outside of my expertise. However, I'm assuming that by lowering prices, you lower the observed rate of inflation, which means that both government debt repayment expenses will be reduced and government measures connected to inflation (e.g., pension payments) would not need to grow as much.

  • This strategy avoids market rivalry while yet allowing private enterprises to profit. After this, there is unlikely to be much of a consumer energy market. The traditional 'benefits of competition' that governments were eager to promote are essentially gone.

  • Under this scheme, it appears that private entities provide the loans, but the government ultimately bears the risk, making it difficult to predict the cost without a crystal ball (anyone know where you can obtain one? It would make my life simpler). What amount of profitability will be permitted for these retail enterprises, some of which are part of massive energy producing companies that benefit billions from increased pricing, when they have this massive government safety net?

  • Many people, obviously, will question about 'nationalization' at this stage. Please forgive me; I try to avoid the 'privatization vs nationalization' discussion because it is very political and outside of my topic and expertise area, so I'll leave it to others.

  • Will individuals be able to swap firms if they are unhappy with the service? Switching from one firm's price-capped tariff to another is now difficult. To maintain the appearance of competition, corporations should be required to enable any client to join their price-freeze tariff.

  • Will the present plans to assist vulnerable persons be maintained? According to rumors, the £400 payout will continue, but the cap will be raised to account for it. Because this is a flat payment, it will benefit individuals with lower expenses more than those with higher costs.

  • But what about the special up to £650 assistance for welfare recipients, seniors, and persons with disabilities - I haven't heard anything yet? Some of this has already been paid, but will the balance be paid? I hope so, because many people in that group are already hurting and will continue to struggle even if prices remain fixed at their current levels.

  • We must also consider wholesale prices and market structure. Again, this is outside my purview, but many argue that we should reconsider modifying the UK wholesale rate pricing, in which all rates are based on the highest marginal rate of energy (i.e., gas is most expensive right now, so all prices are based at that level). That doesn't make any sense.

  • Plus, in the long run, the larger picture of how we generate power is a part of this conversation; after all, we may see an aspect of this loan on our bill for decades.

  • Others, such as those in Northern Ireland or who use heating oil, require assistance as well. In England, Wales, and Scotland, the current price restriction only applies to ordinary rates.
    Northern Ireland has various energy companies and a varied regulatory system.

  • Those who use LPG or heating oil, notably those in rural regions, have also witnessed significant price increases that are not covered by the price restriction.

  • We must also guarantee that the advantages of this strategy are passed on to individuals who pay their landlords for energy bills, students who have locked themselves into high costs in expectation of price increases, those with communal heating contracts or housing, and those in park homes.

  • I haven't covered corporate tariffs since consumer concerns are my specialty, but I assume many of the difficulties are related. Of course, all of this is based on speculation and rumor for the time being, but I thought it could be good to provide some preliminary ideas.


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