Families breathed a sign of relief earlier this month when new prime minister Liz Truss's announced that household energy prices will be frozen for two years.
The ‘ Energy Price Guarantee ’ - also referred to as the October Price Freeze - came about in response to the continued rise in the price of energy, which was threatening to overwhelm many household budgets this winter. Under the scheme, which starts from October 1, a typical household will pay an average of £2,500 a year on their energy bills, frozen until 2024.
But households should bear in mind that the £2,500 quoted for an average household. This means some households could be left paying more than £2,500 for their annual bills if they use more than the average amount, while others may pay less. The Energy Price Guarantee replaced the grim £3,549 Ofgem price cap announced last month.
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So the good news is that the new scheme means typical households will now pay around £1,000 less than if Ofgem’s original October price cap had gone ahead, but the bad news is that £2,500 is still higher than the current £1,971 maximum amount suppliers can charge anyone on a variable tariff paying by direct debit.
The complicating factor at play in calculating winter bills is that you need to factor in the £400 rebate announced by then Chancellor Rishi Sunak in May. And remember when looking at monthly bills is that energy usage varies substantially by time of year, and suppliers usually try to spread payments equally for those on monthly direct debits.
It can be very confusing, so here we have answered some common questions about how the guarantee will work.
What is the Energy Price Guarantee?
Energy bills will be frozen at £2,500 for the average household for two years. This is based on the current £1,971 energy price cap level, plus the £400 rebate already due to all households, and a further £129 round-up to £2,500. Taking into account the £400 back this year, the average household bill will rise by about 6.5 per cent compared to the current average household energy price cap level.
Why was it announced?
The Energy Price Guarantee scheme was in response to the continued rise in the price of energy in the UK.
Why are energy bills so high now?
Demand for gas started to increase as countries began to recover from the pandemic and a shortage in supply caused gas prices to increase in 2021. The problem was made worse by renewable sources like wind and solar producing less power during the winter months, as more people turned their heating up. More recently, Russia’s invasion of Ukraine has threatened supplies and driven up prices further, as Russia is one of the world’s largest producers of oil and gas.
What is the £400 rebate and will I get it?
The Energy Bills Support Scheme (EBSS) is a non-repayable discount of £400 from the Government that every household with a domestic electricity connection will receive from October to help offset the higher energy bills.
How is this rebate paid?
The £400 rebate will be applied over six months: with a reduction of £66 in October and November, and £67 each month from December to March. There is no need to apply, as the discount will be made automatically by your energy supplier. The way you are paid will depend on which company you buy your energy from. You can find out how you'll get your discount here.
So how much will I pay for my energy in October?
The average unit price for dual fuel customers paying by direct debit will be limited to 34.0p/kWh for electricity and 10.3p/kWh for gas, inclusive of VAT, from October 1.
What about standing charges?
The freeze will only apply to unit rates rather than standing charges, which will stay as set by Ofgem. This means that for energy customers paying for variable tariffs by direct debit, standing charges will work out at around 46p per day for electricity and 28p per day for gas.
How does the Energy Price Guarantee work with a fixed tariff?
The Energy Price Guarantee will protect you in the same way that it protects those on standard variable tariffs. If you’re currently paying a higher unit rate for electricity and gas than the new price freeze maximums, you will see your unit prices reduced by 17p/kWh for electricity and 4.2p/kWh for gas from October 1.
I have low usage. Will I still have to pay £2,500?
No. In fact, as the price cap is rising and then a flat £400 rebate comes back, some lower energy usage households will pay less than they do annually under the current price cap
Is £2,500 the most I will pay?
No it's not. It’s important to remember when you read that bills are being frozen at £2,500 per year that this figure is based on a typical or average household’s use. Like the price cap, the Energy Price Guarantee sets the maximum price suppliers can charge households for a single unit of gas and electricity and in common with the price cap, the Guarantee doesn’t set a maximum for your final bill for the year. The price of your energy bill will still depend on how much energy you use.
What is the typical usage?
According to Ofgem, a ‘typical’ household uses 2,900 kWh of electricity and 12,000 kWh of gas in a year. If you use more or less than a typical household your bills will vary).
So how much will my bills be?
Consumer champion Which? has an energy calculator here to work out your monthly direct debit.
As a guide, Thisismoney has published the following calculations:
- A household with a current annual bill of £1,000 would pay about £868
- A household with a current annual bill of £1,500 would pay about £1,503
- A household with a current annual bill of £1,971 would pay about £2,100
- A household with a current annual bill of £2,500 would pay about £2,771
- A household with a current annual bill of £3,500 would pay about £4,039
Will we get another rebate next winter?
It is not clear from Ms Truss's announcement whether the £400 rebate will remain for a second year. Without this in place bills would rise from October 2023.
How will the scheme be funded?
The Government will pay suppliers the difference between the wholesale price for gas and electricity they pay and the amount they can charge customers. The scheme will be funded through increased borrowing.
Will Ofgem still announce the price cap?
Yes, Ofgem will continue to announce price caps every three months. These will still determine the maximum amount the energy providers can charge for a unit of energy in these time periods. As the Government will be now paying for any excess in your bills under the guaranteed scheme, these caps will determine how much the scheme will cost the government.
Now read:
- New rules mean 300,000 households will miss out on energy discount this winter
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- Martin Lewis explains what Liz Truss' energy bills announcement means for households
- Brits could be told to cut their energy use this winter to avoid blackouts
- 15 ways people on DWP Universal Credit can get more financial help to ease cash struggle
