(Bloomberg) — Energy regulator Ofgem will raise its price cap for the average UK home by 21% to £4,279 ($5,173) from January, underscoring the growing gap the government has to plug to maintain its price freeze.
The UK pledged to keep tariffs capped at levels that equate to £2,500 until April, leaving a nearly £1,800 gap per household for the Treasury to subsidize this winter. The government has been augmenting Ofgem’s price cap since October in an attempt to shield households from the worst energy crisis in decades.
“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,” a spokesperson for the Department for Business, Energy and Industrial Strategy said in a statement.
The government has been forced to cut back on its support for households amid rising wholesale costs. Chancellor of the Exchequer Jeremy Hunt increased the energy price guarantee to £3,000 from April. That’s roughly triple a typical annual energy bill before the crisis started last year.
How much the government has to pay will ultimately be decided by the weather. Unseasonably warm temperatures in October helped cut demand for natural gas, saving the government an estimated £260 million compared with energy use in a typical year.
The rise in the price cap underscores that wholesale energy prices aren’t going back to pre-crisis levels anytime soon. Analysts at Cornwall Insight Ltd. expect costs to stay elevated for years, meaning the government will need to find a more targeted way to support households for these measures to be sustainable.
“Extending the EPG, even at an elevated level, has resulted in the government being exposed to variables and factors over which they crucially have no control,” Craig Lowrey, consultant at Cornwall Insight, said in a statement. “More targeted support for the most vulnerable is likely to be needed on an enduring basis if the government wants to protect consumers while also stabilizing its finances.”
(Adds comment from Cornwall Insight from penultimate paragraph.)