Energy price crisis – current policy and outlook for 2023

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Energy prices have been particularly volatile over the last 18 months. The policy response from the UK and Scottish Governments, which attempts to alleviate the impact of higher energy costs on households and businesses, has also changed several times.

SPICe has published two previous blogs looking at this topic:

This blog will look at current policy in place in Scotland and the UK, and the outlook for energy bills in 2023.

Gas prices

Ofgem publishes regular data on the wholesale prices that energy suppliers in the UK face. This shows that the price of gas increased steadily from spring 2021, peaking at 240 pence per therm at the end of December 2021. Prices remained elevated throughout 2022, before increasing significantly throughout the summer (peaking at over 500 pence per therm in late August). The latest data shows that prices have fallen since this peak but remain considerably higher than their pre-2022 levels.

The forward delivery contract price is published by Ofgem, and increased steadily throughout 2021. The price peaked in late summer 2022, and although it has reduced it remains well above its 2021 and earlier price.

The increased cost of natural gas has a direct impact on the price that energy companies pay to distribute gas to consumers, but it also has an impact on the price of electricity due to the way the that the market is structured. In 2021, 39.8% of UK electricity was generated from gas (an increase of around four percentage points since 2020).

Energy prices for consumers

Since 2019 Ofgem have operated an energy price cap which limits the unit price that suppliers can charge households on default tariffs in the UK (business and other non-domestic properties like schools and hospitals are not covered by the Ofgem price cap). Ofgem calculates the price cap reflecting the costs suppliers face in delivering energy to consumers, including the wholesale cost of gas and electricity. This price cap was originally updated twice a year, but since summer 2022 this has been reformed and will now be updated quarterly. The cap in October 2021 increased to £1,277, and in April 2022 to £1,971 for a typical household. As the price cap limits the unit price, households who use more or less energy than is typical will face higher or lower bills than the headline figure.

UK Government subsidy for energy costs

On Thursday 8 September 2022, the Prime Minister announced a package of support to address the energy price crisis. The headline measure is to limit the unit price of gas and electricity so that a household with typical levels of energy use will be face energy bills of no more than £2,500 per year from October 2022 for the next two years. The UK Government also pledged to bring an ‘equivalent’ level of support to all businesses, public sector organisations and the third sector, through a new fund for six months, with targeted support after this period. The Prime Minister also announced that the Bank of England and HM Treasury will launch a joint scheme to provide emergency liquidity to the energy supplier market.  

This chart shows the increase in the Ofgem Price Cap over 2022 before it was replaced by the UK Government energy price cap. Ofgem have announced that the price cap would have increased to £3,549 in October, and then £4,279 from 1 January 2023. Cornwall Insight have forecast that the price cap would be £3,702 from April 2023.

Chart 2 above shows how the bill for a typical household has evolved since October 2021. Note that policy applies a cap on the unit cost not the total bill, so high or low energy users could face higher or lower bills than the price gap/ energy price guarantee suggest. Since October 2022 the UK Government Energy Price Guarantee has limited energy bills for a typical household to £2,500, but in effect this is £2,100 as the UK Government energy bill support scheme is giving every household a £400 discount. This scheme ends in April 2023 though, and the UK Government has announced that the energy price guarantee will increase the limit on typical bills to £3,000 from 1 April 2023. Cornwall Insight forecasts the likely level of the Ofgem price cap for this period, and suggest without the Energy Price Guarantee typical household energy bills would increase to over £3,700 a year from April 2023.

Scottish Government policy response

The Scottish Government published its Programme for Government for 2022 to 2023 (PfG) on 6 September 2022, which noted the existing support package for business:

“In addition, as businesses come under pressure, we have in place an existing package of financial reliefs worth over £800 million. This includes:  

  • The UK’s most generous Small Business Bonus Scheme which takes over 111,000 properties out of rates altogether (as at 1 June 2021).  
  • And the lowest Non-Domestic Rates poundage in the UK for the fourth year in a row” 

The PfG does not include new announcements of support for business, but does note that the Scottish Government is working with business to press the UK Government for: 

  • Protection from energy price rises for small and medium enterprises. 
  • A VAT reduction on business energy bills.  
  • An expansion of shortage occupation lists to enable improvements in filling vacancies from overseas.  
  • Support in handling business debt including the extension of the Coronavirus Business Interruption Loan Scheme and other loans. 

The Scottish Government has stated that their existing policies will deliver almost £3 billion during this financial year in support to households. SPICe published a blog in July which breaks down this figure.

On 10 January 2023, the Scottish Government published its draft energy strategy and just transition plan for the energy sector. The strategy aims to:

“deliver an energy system that meets the challenge of becoming a net zero nation by 2045, supplies safe and secure energy for all, generates economic opportunities, and builds a just transition.”

The strategy notes that support for households includes:

  • doubling the Fuel Insecurity Fund to £20 million for 2022-23
  • expanding the Home Energy Scotland Service to support an additional 12,000 households
  • widening the eligibility criteria for Warmer Homes Scotland.

Support for business, public sector and charities

On 21 September 2022 the UK Government published additional information on the support for business energy bills. Non-domestic energy users (not covered by the Ofgem price cap regime or the UK Government energy price guarantee which supersedes it from 1 October 2022) will see wholesale prices of electricity and gas set at £211 per MWh and £75 MWh respectively. Customers who agreed a fixed term contract after 1 April 2022 and who face costs above these will see an automatic reduction in their bills, while all new fixed term contracts will reflect the new wholesale rates. Those on variable, default or deemed tariffs (a deemed tariff is where a business has started using energy without contracting a supplier ,for example in a new premises) will see their unit prices reduce to match these per unit prices. The press release from the UK government notes that those who are not connected to the mains grid will also receive ‘equivalent support’, with further details to be announced. These policies will be in place for an initial six-month period, expiring on 31 March 2023. 

According to data published by the UK Department for Business, Energy and Industrial Strategy, the average prices paid for energy by non-domestic customers at the start of 2022 was £188.20 per MWh for electricity and £41.52 per MWh of gas, so the new price guarantee represents an increase compared to last winter, but a significant decrease compared to the expected costs without this policy. 

On 9 January 2023 the UK Government announced changes to the support scheme for business, charity and public sector energy costs for one year from 1 April 2023. This new phase will be a two tier support scheme. For all businesses there will be a unit discount of up to £6.97/MWh automatically applied to their gas bill and a unit discount of up to £19.61/MWh applied to their electricity bill. This support is only for businesses facing energy costs above a threshold: £302/MWh for electricity and £107/MWh for gas. The UK Government has set a cap of £5.5 billion on support delivered through this scheme – this compares to an estimated cost of £18 billion for energy bill support provided to businesses since 1 October 2022.

Energy and trade intensive industries will receive a higher level of discount and a slightly lower level of threshold to qualify for the scheme. This will provide a maximum discount of £40.0/MWh for gas and £89.1/MWh for electricity, but will only apply to 70% of businesses energy costs by volume. The UK Government notes that these energy intensive firms:

“are often less able to pass through cost to their customers due to international competition.”

The UK Government has published a list of sectors who will be available for this higher level of support, and note that qualifying businesses may need to register.

Prospects for 2023

Cornwall Insight note that while there have been reductions in the wholesale price, due to the way that energy suppliers buy their energy, they will not be able to take advantage of these lower prices immediately, and note that:

“Our forecasts for [quarter 2 2023] onwards however do illustrate the fall in the wholesale market, with these having dropped by around a quarter since the highs seen in August 2022. Despite these losses, the cap forecasts remain well above the annual sum of £2,500 per household under the EPG. With the enduring nature of support for household energy bills up for review in early 2023, the potential for volatility in energy bills will need to be addressed as part of any ongoing measures established.”

While considerable uncertainty remains, we now know that households and businesses will face a further increase in energy costs from 1 April 2023. Given the wider economic challenges, this will not be welcome news and both the UK and Scottish governments will face pressure to provide further targeted support for those most exposed to these increased costs.

Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit

natural gas flare night 01 – Evanson Place – Arnegard North Dakota – 2013-07-03” by Tim Evanson is licensed under CC BY-SA 2.0.