High-income households will gain more from price freeze

Higher-income households will benefit more from the government’s energy price freeze, announced last week, than their poorer counterparts, according to a new analysis of the package by a leading economics think tank.

In a new report, entitled ‘A blank cheque’, the Resolution Foundation said the universal nature of the Energy Price Guarantee (EPG) means it will provide more support to those with bigger bills. The scheme will see unit rates capped to limit annual energy bills for a typical household to £2,500 over a two-year period beginning in October.

The richest fifth of households are expected to gain an average of around £1,300 this winter, compared to £1,100 for those in the lowest 20% income bracket, because the former typically use more energy, according to the foundation’s analysis.

However, the analysis showed that other factors, such as a household’s size and the energy efficiency of its property, will also have a big impact on how large their gains will be.

Just over one-in-ten households (11%) will gain over £2,000 from the EPG, while another 13% will gain less than £500.

However, taking into account all forms of government support, like the £650 one-off payments for low-income earners announced by former chancellor of the exchequer Rishi Sunak in May, the impact will be “very equal” across income bands with an average gain of around £2,200.

Nevertheless the upcoming winter “will still be tough for many”, the report said.

Typical pre-payment meter customers will still need to find £264 for January’s energy use alone, albeit less than half the figure of £550 had the government announced no more support.

Even with the protection of the EPG, the government’s decision not to continue Rishi Sunak’s £400 Energy Bills Support Scheme for all households beyond April, means typical energy bills in 2023/24 are set to be 30% higher in 2023/24 than the figure for 2022/23 of £1,921.

And at £2,500, typical household energy bills will be more than double (2.2 times) pre-crisis levels, according to the analysis.

However, together with the previously announced support, the EPG will cover 76% of this winter’s increase in bills compared to the equivalent six months from October 2021 to March 2022.

The combination of policy interventions offsets the “majority” of energy price rises relative to 2021/22, with 12 million households – four in ten of the total – receiving more in support than the extra they will pay in bills.

As a result, the government’s package will have a “major impact” on what would have otherwise been a “catastrophically high” increase in energy costs this January.

The foundation estimated that the total cost for the government of the EPG will be around £57 billion this winter, rising to around £120 billion over the full two years.

It said this cost is “highly dependent” on wholesale prices, with the fluctuations in futures prices seen in August alone sufficient to see it half or double. Support for businesses, many details of which are still to be finalised, will also add “tens of billions” to the cost of household support.

A windfall tax on the increased profits of energy generators and producers would have helped “significantly” to meet the cost of the EPG, the report added.

It said the government’s proposal to negotiate new longer-term contracts with low-carbon energy generators might reduce prices they charge today but at the risk of “locking in windfalls with a delay”, with the think tank instead favouring the introduction of a revenue or price cap similar to those being considered or implemented elsewhere in Europe.