Martin Lewis: Energy price freeze rumours – what it means for you, will it work?
Update 8 September 2022: We have now had the announcement. Please see my 15 need-to-knows about the new energy price guarantee rather than this.
Energy firms met the new Liz Truss administration yesterday, and it's strongly rumoured that top of the agenda was freezing the price cap at its current level (£1,971/yr for someone on typical use) and adding small business to the cap too. This is similar to suggestions made by the main opposition parties – though likely to be funded in a different way.
Since then we've heard mutterings that the cap will be frozen at £2,500/yr for someone on typical use – but the £400 reduction in bills will still come – so overall that's £2,100. Of course most people aren't on typical use, but using that info as a basis, it'd mean a rise in outlay of an average 6.5% (slightly less for lower users, more for higher users) compared to what you pay now, as opposed to the planned 80% rise in the cap.
The announcement is apparently due on Thursday, so I thought it was worth speedily and scruffily bashing out a dozen preliminary thoughts while the policy may be being formulated (clearly I'm trying to make educated guesses on some of it).
- Millions desperately need help. The planned 80% energy price cap rise set for 1 October in Eng, Scot & Wales is a catastrophe, that's only set to worsen in January with a further predicted 50% rise, taking a typical bill then to £5,400/yr (we're 7mths through the 10mth assessment period, so this figure is likely in the right ballpark).
Predictions after that are more difficult, but still likely very high, unless we see an end to the war in Ukraine, or there is worldwide economic recession.
- Freezing (or near freezing) the price cap now would help substantially. I have longly and strongly been calling for further Government intervention. Yet whenever asked, I have been careful to be agnostic over the method used to help – as my prime concern has been trying to ensure there was a will to do something more.
Freezing the price cap at its current level certainly fulfils that brief, so I absolutely would welcome it. It would go a decent way to mitigate further short-term damage, and the risk to health and mental health, causing a sigh of relief for many.
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 big benefit, and problem, of this is (almost) everyone gets it. In past conversations with Rishi Sunak when he was Chancellor, he recognised both practically and politically that while you had to focus help to the poorest and most vulnerable, in doing so, some on low to middle incomes would feel they had unfairly missed out. That is even more so now, with cost rises so large, many middle earners will find it hard to manage. By (near) freezing the cap, you spread the help net very wide.
However that means the benefit goes to every bill payer, including wealthy people (yes, like me). And those who gain the most from it in cash terms will be those with the highest bills (many, though not all, will be at higher income levels), so clearly it isn't targeted at helping those who need it most.
PS: For Liz Truss who's been saying 'handouts to individuals' aren't something she's a fan of, this structure is likely politically beneficial as she can say it isn't a 'handout', it is lowering costs.
- What happens to those who have fixed tariffs? Up to 15% of households are on fixed tariffs, many have locked in at higher prices, as they are risk averse and wanted to protect their bills. So what happens? Will they automatically be put on the price freeze?
If they are not automatically moved, will they be allowed to switch to the price freeze? If so and their tariff has early exit penalties (some of which can be £300+), will they still be charged? (Hopefully not, especially as it'd likely be an internal tariff change and exit penalties are often wiped for those).
This will need sorting out as a priority so those who've tried to protect themselves don't miss out. I would of course be lobbying for that and hope there's a chance some policymakers may just be reading this now to ensure it is addressed.
If you fixed within the last 14 days, do check when the cooling off period ends, as on Thursday when we hopefully know what's actually happening you may want to cancel.
PS: The political risk of policy shift has always been there (it's one I included in my Should I fix guide) though this is perhaps a more radical turn than many expected. The 'should I fix' call has never been easy. That's one reason when explaining the level it's worth considering at, I've always described as 'crystal ball gazing' with no way to know if it's the right call.
Some who have made the call to fix recently may feel frustrated by this. Yet ultimately remember, you made the call based on the information available at the time, that's all you can do, it was a good decision for you based on what you knew, even if the outcome doesn't turn out to be the best.
- We're freezing at or higher than the current level, but that is already high. If we freeze now, we have already seen the price cap rise 50%, so we're freezing at a high level (and higher than some other countries have). It would mean this winter's bills would be running at roughly at £2,000/yr (or £2,100 if latest rumours are right) for typical usage compared to last winter's £1,300/yr. That is not an insubstantial difference and is a struggle for many.
Yet there is a balance to be had here – of how much government can do in the face of huge international hikes in bills. Compared to the status quo, where an average horrific 150% further rise is currently predicted over the next 12 months, this will be a huge cost reduction for people.
- It's suggested energy firms will take a loan for 18mths to cover costs – then it'll be repaid over a decade – but that's a gamble. What if things don't get cheaper? The main proposal (if it follows what some big energy retailers have proposed before) is that they will take out large commercial loans, backed by a Government guarantee, to freeze bills now. They will still need pay the current high wholesale rates to energy producers to buy energy, but then in 18 months' time, once it's hoped wholesale rates drop, they will be able to add a chunk to bills over 10 or more years to repay it.
Yet what if bills don't drop – what happens then? The predictions of energy prices have continually been underestimated by the energy analysis firms, as they've kept creeping up. There is a risk this happens again. We can't add the 'energy firms loan payback' to bills if they're still at the high levels, so who pays, what happens?
Worth noting, some are suggesting they won't do it via a loan on bills, but it will be paid for from general funds as government borrowing. Clearly, we'll have to wait and see.
PS: There was huge criticism of the Rishi Sunak loan-not-loan scheme that was eventually dropped. If this is a loan it will be a very different structure – the loan here is to energy firms not individuals, though some of the impacts would likely be similar. Those who don't pay bills now but do later when the cost is higher to repay will lose out, those who do pay now and don't later will gain.
- This could reduce the rate of inflation, beneficial for UK debt costs. I'm a consumer finance specialist, not an economist, so this is outside my area. Yet I'm presuming part of this proposition is that by reducing prices, you lower the measured rate of inflation, which means both that this will help reduce repayment costs for government debt, and that govt measures linked to inflation (eg, pension payments) will not need to rise as much.
- This plan shifts away from market competition, but still leaves private firms taking in the cash. There is unlikely to be much of a consumer energy market after this happens. The old 'benefits of competition' governments have been keen to push are mostly gone.
Under this plan it looks like private companies take the loans, but ultimately government underwrites the risk – so it's tough to know where the cost will sit without a crystal ball (anyone know where you can get one? It'd make life easier). What level of profitability will be allowed for these retail firms – some of whom are part of giant energy producer companies who are making billions from higher prices – when they have this huge government safety net?
I know many will understandably ask about 'nationalisation' at this point. Forgive me, I always try and avoid the 'privatisation versus nationalisation' debate, as it is highly party political and outside of my subject and expertise area, so I'll leave that to others.
- Will people be allowed to switch firm if they don't like the service? Currently it's tough to switch from one firm's price-capped tariff to another. If we are keeping the veneer of competition, firms should be mandated to allow any customers to join their price-freeze tariff.
- Will the current plans to help vulnerable people remain? The rumours are the £400 payment will remain, but the cap will be increased to incorporate that. As this is a flat payment it actually will help those with lower bills more, and reduce higher bills by a smaller proportion.
Yet what about the specific up to £650 support for those on benefits, pensioners and people with disabilities – I've not heard anything yet? Some of this has already been paid, but will the remaining payments come? I hope so, many of those in that category are struggling substantially already and will do even if prices are frozen at the current level.
- We need to look at wholesale rates and market structure too. Again outside my area, yet coupled with this move, many are arguing we need to look at changing the UK wholesale rate pricing, where effectively all rates are based on the highest marginal rate of energy (ie, gas is most expensive right now, so all prices are based at that level). That doesn't seem to make sense.
Plus of course, for the long term, the bigger picture of how we generate electricity is part of this discussion – after all, we may find an element of this loan on our bill for decades.
- Help is needed for others too, eg, those in Northern Ireland or using heating oil. The current price cap only applies to standard tariffs in England, Wales and Scotland.
Those in Northern Ireland have different energy firms and a different regulatory structure. Those who have LPG or heating oil, including many in rural areas, have seen substantial rises too, and are not covered by the price cap.
We also need to ensure the benefits of this policy are passed on to those who pay their landlords for energy bills, and students who've been locked into high prices in anticipation of rises, those with communal heating contracts or living, and those in park homes.
I've not mentioned business tariffs in here, as consumer issues are my bag, but I suspect many of the issues are similar. Of course, all this is based on supposition and rumour right now, but I thought it'd be useful to put some provisional thoughts out there.