On Monday (27th February), Ofgem are due to announce the result of the latest Price Cap for the period 1st April to 30th June 2023.
Auxilione have been tracking the development of the Price Cap, as we have done in previous periods, and outline our final forecast for the upcoming cap below.
PURPOSE OF THE PRICE CAP
When the Price Cap was first introduced it was designed to protect energy consumers, the vast majority of which were ‘active switchers’ who would ensure they were on a competitive deal and did not require reliance on this protection. However a small minority of the market were not ‘active switchers’ and the Price Cap ensured such consumers were not taken advantage of by energy suppliers, or forgotten and left on outdated tariffs.
Its design could never have envisaged that almost every household in the UK would rely on it today. Throughout the ‘energy crisis’ of 2022, the design was changed from a twice yearly or ‘seasonal’ Price Cap to a quarterly set cap in a bid to react to the extreme volatility seen and further protect consumers and suppliers alike. Unlike Q4 2021, where we saw almost 30 suppliers exit the market, Q4 2022 saw no such supplier failures.
The fundamental methodology applied in setting the cap has remained largely unchanged and allows suppliers to appropriately hedge their risk for customers potentially exposed to the cap whilst at the same time give certainty to consumers they are paying ‘market reflective’ prices. However the recent wholesale market volatility has meant consumers will pay a ‘lag’ premium (positive or negative), as the time period in which the cap is priced starts some four months before the cap takes effect.
That said, consumers would have enjoyed a positive ‘lag’ effect in the previous caps whilst wholesale energy markets were rising and the effect of the premium was delayed into a future Price Cap. This would explain much of the increase between the October 2022 cap of £3,549 and the January 2023 cap of £4,279. From April 2023 that ‘lag’ should start to turn negative, albeit the benefit will not be properly seen until later in the year.
WHAT DO THE PRICE CAP NUMBERS ACTUALLY MEAN?
It is worth noting that the Price Cap announcement is made as an annualised financial value – something we have regularly referred to as the ‘headline’ rate, based on a ‘typical domestic consumption value’ (or ‘TDCV’). This is not reflective of what individual households will actually pay. The ‘cap’ is based on the standing charge and unit rates. As such individual households are unlikely to be able to directly relate to the ‘headline’ rate. This rate also has regional variations, as well as further variations based on payment method and meter type, but is averaged for the purpose of the ‘headline’ rates being published.
Whilst this may appear somewhat confusing, domestic consumers should focus on the standing charge and unit rates (applicable to their circumstances) and apply this to their individual usage which can be found on a recent gas/electricity bill.
It is important to note that the upcoming Price Cap has been calculated during the period of mid-November 2022 to mid-February 2023, the early period of which was still experiencing extremely high wholesale prices. For example, at the start of the calculation period UK gas prices for Q2-23 were 314p/therm, but were 124p/therm at the end of the period. Whilst wholesale energy prices have reduced in recent weeks, this has not been fully captured by the long-standing methodology on how the Price Cap is calculated for the next period.
Sadly, whilst we forecast a reduction in the Price Cap value, we forecast an overall increase in the cost to consumers this next cap period due to the overarching Government support schemes.
ENERGY BILLS SUPPORT SCHEME (EBSS)
In September 2022, the Government announced a £400 contribution to help with the increased costs of energy over the winter months (October to March). This amount was paid to the electricity accounts for all households on a monthly basis (around £67 per month) and is due to stop after the last payment is made in March.
ENERGY PRICE GUARANTEE SCHEME (EPG)
In October 2022 the Government introduced an additional support mechanism to further protect consumers from the continued increase in exposure to energy markets, and the Ofgem Price Cap itself.
It is important to emphasise the impact of this mechanism, the Energy Price Guarantee (EPG), on consumers which is also due to change from 1st April from £2,500 to £3,000 – again these are annualised values based on the TDCV and have regional variations aligned to the Price Cap.
In real terms, as an average, the EPG sets the standing charge and unit rates for the period 1st October 2022 to 31st March 2023 as:
Gas: Standing charge of 28p/day and a unit charge of 10.3p/kwh.
Electricity: Standing charge of 46p/day and a unit charge of 34p/kwh.
In order to reach the new level of £3,000 for EPG, we estimate these are likely to increase from 1st April to:
Gas: Standing charge of 29p/day and a unit charge of 11p/kwh.
Electricity: Standing charge of 50p/day and a unit charge of 47p/kwh.
Mindful of the fact that the Government are due to hold a budget on 15th March, the announcement of £3,000 may be confirmed or superseded with a different value. Considering that wholesale market levels have reduced significantly since the announcement to increase the EPG threshold was made (in November 2022 when the upcoming cap was just starting to be calculated), it seems that a retraction of this proposal could have merit. It would also reinforce the original announcement of EPG which was intended to be in place at £2,500 for a period of two years from October 2022 under then Chancellor Kwasi Kwarteng. Since then, current Chancellor Jeremy Hunt announced it would be for just six months and in turn announced the £3,000 proposal from April to remain in place until March 2024.
With the above in mind, the impact of the Ofgem Price Cap is therefore muted for the period from 1st April because the forecast is above the EPG level.
AUXILIONE PRICE CAP FORECAST
As mentioned earlier, the previous Price Cap of £4,279, in place for 1st January 2023 to 31st March 2023, was priced in an extremely volatile market. Wholesale costs made up around 75% of the cap, which we have forecast to have reduced to around 65% in the upcoming cap period. Whilst the cap overall is forecast to have reduced by almost 25%, some impact of the historic period will have to be recovered in future periods and this includes Covid related costs as well as some electricity market balancing costs. Both of these items were confirmed by Ofgem late last week and expected to impact some of the fixed cost elements of the Price Cap. As such we forecast an increase to the standing charge and reduction in unit rates in the upcoming cap period.
Auxilione have assessed the ‘headline’ rate for the cap period April-June 2023 to be £3,282 annualised at TDCV for a direct debit customer on a single rate meter – this measure is used in all ‘headline’ rate comparisons. In real terms, we expect the standing charge and unit rates (rounded to the nearest penny or half-penny) to be:
Gas: Standing charge of 29p/day and a unit charge of 12.5p/kwh (vs 28p and 17.0p/kwh in the current cap).
Electricity: Standing charge of 50p/day and a unit charge of 51.5p/kwh (vs 46p/day and 67.5p/kwh in the current cap).
Note these are UK average, but regional variations apply, as will other payment and meter types – these will be detailed in the official announcement by Ofgem.
As in previous cap forecasts, they are just that – a forecast. Only the official announcement by Ofgem will confirm the rates to apply from 1st April 2023. However, as we follow the prescribed methodology set out by the regulator, we do expect to be within +/- 1% – as we have been in previous forecasts.
As the Price Cap is expected to out-turn above the EPG rates they will not apply directly to consumers for the period, instead the EPG rates will take precedence with the difference paid for by the Government support scheme (EPG).
This confirms an overall increase to consumers energy costs effective 1st April, compared to the previous three months, particularly taking into account the end of the EBSS payment. As such it could be argued that the incoming EPG rate of £3,000 will be a significant increase to households taking into account the current EPG+EBSS (annualised) are currently £1,700. This would give an implied actual cost increase to households of over 75% from April, which further supports the call for the EPG scheme to continue at a rate to minimise this impact and not be increased to £3,000.
AUXILIONE FUTURE PRICE CAP FORECASTS
We are pleased to note that in recent weeks the wholesale cost of energy has lowered and this will be captured in future Price Cap periods (i.e. they will benefit from the aforementioned ‘lag’ effect). At the current wholesale levels we forecast the July-Sept Price Cap period to be below the expected EPG level and perhaps out-turn close to £2,000. Of course the calculation period has only just started for this cap period and it is therefore far too early to speculate the likely out-turn value at this stage.
A settling of wholesale prices should help spur a return of competitive activity in the domestic retail market, the potential reintroduction of fixed price deals and a lack of reliance on Government support schemes for consumers in the months ahead. That said, 2023 remains extremely sensitive in our outlook despite the comfort seen in the market in recent weeks. March 2023 is currently expected to have temperatures below seasonal normal and this may impact the wholesale market during the July-Sept Price Cap calculation period.
PREVIOUS PRICE CAPS
For reference, previous Price Caps have been set at:
| Price Cap Period | Price Cap Value (annualised at TDCV) |
| January 2019 – March 2019 | £1,137 |
| April 2019 – September 2019 | £1,254 |
| October 2019 – March 2020 | £1,179 |
| April 2020 – September 2020 | £1,162 |
| October 2020 – March 2021 | £1,042 |
| April 2021 – September 2021 | £1,138 |
| October 2021 – March 2022 | £1,277 |
| April 2022 – September 2022 | £1,971 |
| October 2022 – December 2022 | £3,549 (superseded by EPG at £2,500) |
| January 2023 – March 2023 | £4,279 (superseded by EPG at £2,500) |
| April 2023 – June 2023 (forecast) | £3,282 (likely to be superseded by EPG at £3,000) |
TDCV for gas is 12,000 kwh per annum and 2,900 kwh for electricity. Based on the Auxilione forecast of the Price Cap we estimate the annual cost to be £1,606 and £1,676 respectively to give the ‘headline’ rate of £3,282. This is calculated as Gas 29p x 365 days = £106 standing charge plus 12.5p x 12,000 kwh = £1,500 = £1,606 gas cost. Electricity 50p x 365 days = £182 standing charge plus 51.5p x 2,900 kwh = £1,494 = £1,676 electricity cost.
Individual household costs will differ depending on actual usage, region, meter type and payment method, but can be determined by multiplying the forecast unit rate by actual consumption as shown in the example above. Standing charges will apply each day regardless of usage level.