The cost to the government of shielding households from soaring energy bills is expected to double in the new year to up to £5bn a month, as ministers prepare to push the button on a public information campaign to reduce usage.
The rising costs come as the Treasury seeks to soften the blow of high bills, after the energy regulator, Ofgem, announced an increase to its price cap.
In response to the energy crisis, ministers are planning to launch a £25m advertising and social media campaign before Christmas to encourage people to save money and energy.
They have identified eight measures that could save households up to £420 a year, according to the Times. The measures to cut bills include reducing the temperature of boilers, which could save £80, turning off radiators in empty rooms, which could save £105, and switching off electrical devices rather than leaving them on standby, which could save £55.
Ofgem said on Thursday that its price cap would reach the equivalent of £4,279 a year for the average household from January. It said the cap, which is adjusted every quarter, will increase by an average £730 for the three months from the start of next year. However, the government’s energy price guarantee (EPG) limits the typical annual bill in Great Britain to £2,500 in the same period.
Although the importance of the Ofgem price cap for households is reduced by the EPG, it still matters because the cost of the Treasury subsidy on bills is linked to the difference between the two.
The government provides energy suppliers with the difference between the unit rate under the EPG and what they would have charged their customers were it not in place, a rate set by the Ofgem cap.
The new cap will force the Treasury to pay 33p per unit of electricity and nearly 7p per unit of gas that households use. The energy consultancy Auxilione said this would push up the cost of running the EPG from £7.8bn in the last three months of 2022 to £15.1bn in the first three months of next year.
The energy supplier Ovo estimates the government will pay about 33p every time someone uses their oven for half an hour or an electric shower for six minutes.
The chancellor, Jeremy Hunt, said in last week’s autumn statement that the EPG would be lifted to £3,000 for a typical household from April, which should reduce the amount the Treasury must pay in subsidy.
Average household bills were limited to £1,277 a year ago, under Ofgem’s price cap. That had been due to rise to £3,549 from October.
However, the then prime minister, Liz Truss, intervened to introduce the EPG for two years. Hunt later truncated this to six months, then extended it by 12 months from April.
Truss had blocked a public information campaign on how to cut down on energy use, arguing it could be seen as “nannying” Britons. Michael Gove, the levelling up secretary, said on Thursday that the campaign would not be “nannying or patronising”.
Other measures to cut bills that are expected to be part of the campaign include turning off the heating when going out, which could save £105 a year and switching baths for showers, which could save £20.
Martin Lewis, the consumer champion and founder of the Money Saving Expert website, welcomed the planned campaign and said on Twitter he was glad the government appeared to have listened to him on the need to advise people to lower thermostats.
“I’ve made representations to the govt on this, suggesting how it could be done, and I’m pleased to say that I’ve now been told that decision has not been made yet – so hopefully if the campaign does happen - this will be in it.”
I've made representations to the govt on this, suggesting how it could be done, and I'm pleased to say that I've now been told that decision has not been made yet - so hopefully if the campaign does happen - this will be in it. https://t.co/F0i9O6Tkpf
— Martin Lewis (@MartinSLewis) November 24, 2022
The consultancy Cornwall Insight has predicted the EPG will cost the government £42bn in its entirety, representing about £2.3bn a month. Investec estimates the policy will cost £24bn, or an average of £4bn a month, for the first six months.
Forecasts of the cost of the EPG are highly dependent on the wholesale price of gas, which has been volatile, particularly since Russia’s invasion of Ukraine.
Ofgem has changed the frequency of changes to the cap from every six months to quarterly to respond more quickly to movements in energy markets. Cornwall Insight expects the cap to reduce to £3,921 from April and then to about £3,400 for the last six months of 2023.
The Treasury said last week that £1.8bn was paid out in October through the energy bills support scheme, reducing costs for more than 27m households. It said £136m worth of vouchers had been provided to traditional prepayment meter customers.
The government hopes to fund some of the cost of the scheme through windfall taxes on oil and gas and electricity generation companies. The mild start to winter, and an easing in the price of wholesale gas, will have helped reduce the cost of the policy to the taxpayer.
However, there are concerns that bills will remain high next year as countries struggle to replace supplies of Russian gas, which have been cut since the invasion of Ukraine.
The Department for Business, Energy and Industrial Strategy said: “The energy price guarantee is protecting consumers from soaring energy costs, meaning people’s bills will not rise in line with today’s Ofgem energy price cap increase.”
