What Will Happen to the Energy Price Cap in the UK?

Previously, it was agreed that Ofgem would be able to review the domestic energy price cap four times during a typical 12-month period. This caused significant consternation through 2021, as wholesale prices began to soar following Russia’s invasion of Ukraine.

Back in August, it was announced that the energy price cap would increase to £3,549 from October 1^st, while a further hike was expected to follow after an additional review in January.

However, new PM Liz Truss has announced a new energy policy that will freeze the average annual household energy bill at £2,500. This will come into play at the beginning of October, but what does this mean for the energy market and is it an advisable policy?

A Look at Truss’s Energy Policy – What Does it Mean?

The invasion of Ukraine only served to exacerbating an existing imbalance between supply and demand in the oil and energy markets, while ongoing supply chain issues caused by Brexit and the coronavirus pandemic have also impacted domestic prices.

Rising energy prices have also contributed to rampant inflation in the UK, which peaked at 10% in July and had been forecast to reach 13% and then 18.6% in October and January respectively.

Truss’s new energy policy has sought to tackle this issue directly, by freezing the annual household energy price cap bill at £2,500 per year from October. This directive will remain in place for two years too, while it could cost anywhere between £100 and £200 billion according to estimates. 

This will immediately cap the gas and electricity tariffs, ensuring that households will no longer face an 82% price hike in October. So, although households can expect to pay approximately 27% more than usual in the autumn, they will no longer face the crippling prices that were being forecast.

Because of this, the BoE has forecast that inflation will no longer hit 13% in October, with some suggesting that it may have already peaked (in fact, inflation depreciated slightly to a little under 10% for the first time in 11 months during August). 

Is the Policy Effective?

Ultimately, the policy delivers on its promise of helping the most under-resourced households, while ensuring that energy prices don’t continue to rise indefinitely.

However, it has received criticism for its broad and untargeted nature, primarily from the National Institute of Economic and Social Research thinktank. In fact, the NIESR have called the plan “needlessly inefficient and expensive”, while arguing that more targeted measures and the deployment of a variable price cap would have been more cost-efficient.

More specifically, Truss could have invested more time in lowering the bills further for the poorest households in the country, while utilising a variable cap for richer homeowners who would pay fairly for the energy that they use (creating a policy that pays for itself in some respects).

Of course, the policy was created in a rush, while it should be noted that it’s broadly typical of Truss’s vague economic approach. This is why stocks and forex market traders have reacted negatively to Truss’s election, as there remains a great deal of economic uncertainty and a lack of trust in the current government’s competence.

Ultimately, it’s good news that action is being to ease the energy price crisis and help households nationwide. However, it’s undoubtedly untargeted and profligate in nature, and this could create additional costs and levies for households further down the line.