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£2,500 energy price guarantee set: What it means for your bills

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
08/09/2022

The new Prime Minister has set out an energy price guarantee that will curb the average bill to £2,500 a year over the next two years.

After days of rumours of an energy price freeze announcement, Liz Truss has set out an energy price guarantee to help households with the soaring cost of utility bills.

She said: “This government is moving immediately to introduce a new energy price guarantee that will give people certainty on energy bills.

“It will curb inflation and boost growth.

“This guarantee – which includes a temporary suspension of green levies – means that from 1 October, a typical household will pay no more than £2,500 per year for each of the next two years while we get the energy market back on track.

“This will save a typical household £1,000 a year. It comes in addition to the £400 energy bills support scheme. This guarantee supersedes the Ofgem price cap and has been agreed with energy retailers.”

The new guarantee will apply to households in Great Britain, with the same level of support made available to households in Northern Ireland.

Those households who do not pay direct for mains gas and electricity – such as those living in park homes or on heat networks – “will be no worse off” and receive support through a new fund.

The government will provide energy suppliers with the difference between this new lower price, and what energy retailers would charge their customers were this not in place. It is expected to cost over £100bn.

Last month, industry regulator Ofgem confirmed the energy price cap – which applies to approximately 24 million on default tariffs – would rise 80% from £1,971 currently to £3,549 on 1 October 2022.

This anticipated announcement by Truss means the average household will save around £1,000, and by factoring in the £400 energy bill support, means those with typical energy use will pay roughly the same as now (£1,971 a year vs £2,100).

However, the energy price cap is a limit on the unit rate and standing charge that energy suppliers can charge, so it’s important to understand it is not a limit on bills. This is because the figure is calculated using average energy use in the typical home.

Justina Miltienyte, head of policy at comparison site Uswitch, said: “It’s important to remember that bills are not frozen. This is a cap on the unit rate of the energy you use – it is not a cap on your final bill. The less energy you use, the less you will pay, so you may still be able to save money by managing your energy usage this winter.”

Households facing difficult winter

She added that while millions of households will be “breathing a sigh of relief” as the guarantee removes the uncertainty of quarterly price increases billpayers were expecting, households will still be facing an extremely difficult winter.

“Taking into account the £400 energy bill support, households could pay on average £237 more for energy over the three coldest months than they did last year – on top of hikes across other essentials such as food and fuel.”

This is echoed by Alice Haine, personal finance analyst at DIY investment platform, Bestinvest. She said:Energy prices are still significantly higher than they were a year ago, with some households already struggling to absorb the rising costs and food prices are high too. It means household budgets are not completely out of the woods yet.

“With inflation standing at 10.1% and expected to trend higher next month, households are already grappling with higher food bills along with rising costs for all the other goods and services they consume. Add in falling real incomes as inflation erodes the value of take-home pay and it’s vital that Brits continue to adopt a more frugal approach to life this winter if they want to avoid taking on debt.”

More help needed for the most vulnerable

For Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, those people at the sharpest end of price increases will be “hugely disappointed” with today’s announcement.

She said: “It’s also a real blow not to have had any news on equalising the cap for those on pre-payment meters. It’s ludicrous that those who can least afford it are charged the most – paying a penalty for being worse off.

“They needed a broader package of measures, providing meaningful support for the most vulnerable. Without it, a freeze will simply slow the pace at which things get much, much worse.

“There will still be millions of people facing a personal crisis. Citizens Advice say that two people a minute are turning to the charity for crisis support, through foodbank vouchers or charitable donations – and that’s in the summer, when people on pre-payment meters are paying for far less energy. As energy needs spike, vulnerable people face horrendous challenges.”

According to Martin Lewis, founder of MoneySavingExpert, for billpayers locked into a fixed deal, they will be able to choose to stay on or they will be able to leave and switch to the new subsidised tariff with no early exit penalties.

Truss added the government would also support businesses, charities and public sector organisations with their energy costs this winter, offering the equivalent guarantee for six months. After this initial six-month scheme, the government will provide further support for vulnerable industries, such as hospitality.