Government interventions to freeze energy prices for households for two years are expected to cost the government £89bn, according to the first major costing of the policy by the sector’s leading consultancy.
The analysis from Cornwall Insight shows the prime minister’s Energy Price Guarantee (EPG) could cost as much as £140bn in a worst-case scenario with a best case outcome of £71.19bn.
The scheme allows for a freeze in the default tariff cap at a value of £2,500 for a typical British dual fuel household, with domestic consumers on fixed tariffs afforded the same price protections as other domestic consumers under the EPG.
This support will be achieved by capping the unit price for wholesale power and removing the policy costs for green levies.
Cornwall Insight analysed projections of wholesale market moves to cost the intervention.
In its base case scenario, analysts expect the policy to cost £89bn assuming 29mln UK households. That assumes the cost of supporting each household would be just over £1,000 in the first year, and about £2,000 in the second year.
This outcome uses wholesale energy closing prices on the InterContinentalExchange (NYSE:ICE) for NBP natural gas, baseload electricity and peakload electricity on 28 September 2022.
The consultancy said the potential £70bn swing between the cost of the EPG between the low (£71bn) and extreme high (£140bn) scenarios serves to highlight the extent of the uncertainty relating to the cost of the scheme with particular variability in year two, assuming suppliers are hedged for this winter.
It highlighted pervasive and significant uncertainties relating to wholesale market volatility, geopolitical instability, macroeconomic policy, further European and international policy and regulatory intervention, the elasticity of demand, weather and infrastructure resilience across both years of the EPG as variables to the existing forecast.
It suggested that a return to more “normal” price conditions is not anticipated until well into the second half of the decade and said everything is pointing to the need for a viable exit strategy to the EPG which it thinks should be seen as a reviewable stopgap that buys time to consider more robust alternatives.
One way is to manage the volume down by encouraging energy efficiency and voluntary demand reduction. Other economies are seeking such reductions, with campaigns planned or launched. It may be that such activity would also benefit the UK, Conrwall said.