Cost to Treasury of subsidising home energy bills falls by ?5bn, experts say

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The predicted cost of subsidising household energy bills to the Treasury has fallen by ?5bn after a drop in wholesale gas prices, a leading consultancy has said.

Cornwall Insight has forecast the government’s policy to protect households from the cost of living crisis – the energy price guarantee (EPG) – will now cost ?37bn.

Gas prices have fallen sharply in recent days amid mild weather and signs that European gas storage levels are higher than expected, after a scramble to replace Russian supplies. If wholesale gas prices remain low through the year, the cost of subsidising bills will significantly reduce.

The consultancy said in November that it expected the EPG to cost ?42bn over 18 months, after the chancellor, Jeremy Hunt, made the policy less generous.

Liz Truss had pledged during her brief tenure as prime minister to keep average bills at ?2,500 for two years at an estimated cost of between ?72bn and ?140bn.

The intervention spooked financial markets and Hunt later made it less generous, keeping average bills at ?2,500 until April and ?3,000 for a year afterwards.

The policy aims to cap consumer energy bills, and compensates suppliers the difference between the Ofgem price cap and the EPG.

Cornwall Insight had expected the cap to be as high as ?3,182 in the second half of the year, but it said on Wednesday that it now predicts annual bills will settle at about ?2,800 from July – below the ?3,000 EPG rate, but more than twice as high as the cap was in 2021.

The consultancy expects the price cap – which is currently ?4,279 – to hit ?3,545 from April before falling to about ?2,800 for the remainder of the year.

The reduction in the cost of the policy will be a boost to Hunt, who is examining options to extend energy support for businesses. The chancellor is meeting with business groups on Wednesday to discuss the issue and is expected to halve the Treasury’s energy bill support for firms.

Dr Craig Lowrey, the principal consultant at Cornwall Insight, said: “While it is positive to see a drop in the price cap forecast, household bills are set to remain high. With the energy price guarantee rising in April, the second half of the year will still see a typical household facing bills that are well above historic levels and facing costs that many can ill afford.

“The cap’s fall below the threshold of the EPG will, if wholesale prices continue at this level, effectively see the scheme no longer costing the government. We must remain cautious as the government has essentially been underwriting a volatile wholesale energy market – one which is likely to remain unstable throughout the year.”

He added: “Even if energy prices continue at current levels – which is a big if – the costs to the government over the full period of the EPG are still contributing to government borrowing and will ultimately fall at the feet of consumers in the form of higher taxes.”

Investec analyst Martin Young said the benefits of a one-off support scheme, which hands households ?400, will fall away from April while water and council tax bills are expected to rise, exacerbating the cost of living crisis.