Thread by @BenChu_

We’re told wholesale #energy prices are falling, which should bring our bills down.

Yet we’re also warned household #EnergyBills are going to spike by 40% in April & the gov is being called on to act.

How can we reconcile the two?

Feeling confused?

A thread for you...🧵1/

...To understand what’s going on we need to go back to the design of Liz Truss and Kwasi Kwarteng’s Energy Price Guarantee (EPG) from last October...2/bbc.co.uk/news/business-…

...In the face of soaring wholesale energy prices, this EPG capped the rate households could be charged by their suppliers for their gas and electricity, meaning a typical household’s bills would only rise to around £2,500 a year...3/

...In the absence of that state intervention it was estimated at that time that typical household bills might have shot up to more than £4,000 this year.

But then Rishi Sunak became PM and Jeremy Hunt became Chancellor and in November they CHANGED the design of the EPG...4/

...They decided that from 1 April 2023 the effective ceiling on a typical household energy bill would rise from £2,500 to £3,000...5/ bbc.co.uk/news/business-…

...And because this reduction in the generosity of the EPG coincides with the end of a scheme which saw households receive £400 in energy credits over 6 months campaigners say the two changes combined will impose a 40% price hike on bills from 1 April...6/moneysavingexpert.com/news/2023/02/m…

...This, they estimate, could push an additional 1.7 million households into fuel poverty, meaning when they spend the required amount to heat their home, they are left with a residual income below the official poverty line...7/ nea.org.uk/publications/u…

....Campaigners are urging the Chancellor to extend the original EPG at £2,500.

The Labour party says it would do this.

Yet how much would this extension cost the public purse?...8/

labourlist.org/2023/01/labour…

...Well campaigners argue much less than assumed in November.

Why? Because wholesale energy prices have indeed come down quite dramatically since then.

Futures suggest prices in 2023 will be around 150p/therm (blue line) vs 300p/therm indicated in Nov 2022 (red line)....9/

So what does this mean for the cost of the EPG?

This is where it gets a bit complicated, but bear with me 🙏...10/

...Entirely separately from the EPG, the energy regulator Ofgem sets a cap on what households can be charged for energy.

But this cap merely limits the price households can be charged by the suppliers to prevailing wholesale market energy prices...11/ ofgem.gov.uk/information-co…

...It’s currently at £4,279 for a typical household - well above the £2,500 EPG.

When the Ofgem price cap is ABOVE the EPG that means the state is effectively paying out subsidies to households for their energy consumption...12/

...And based on energy market futures prices back in November it was projected to remain well above the EPG for the rest of the year...13/

...But look at the new projections for the Ofgem price cap (the blue bars) from @CornwallInsight, reflecting falls in wholesale gas prices.

From July the Ofgem cap is now expected to be LOWER than the £2,500 EPG.

The upshot?

No household subsidy required beyond then...14/

...That’s why campaigners are saying extending the £2,500 ceiling on the EPG would be temporary state subsidy support for households - only lasting until bills come down ANYWAY due to falling wholesale prices....15/

...But there's still the question of cost.

Analysts at Oxford Economics have put the cost of keeping the EPG at £2,500 after April at around £2.5-£3.5bn.

But there's some context for thinking about that figure...16/

...The total cost of the EPG subsidy in 2023/24 was estimated by the Office for Budget Responsibility in November at £12.8bn.

Estimates from the Resolution Foundation now suggest the total cost could be as low as £1.5bn.

So a saving of £11.3bn....17/

...Now, this certainly exaggerates the saving because the state's windfall tax revenues on energy producers will also be lower due to those lower wholesale prices.

But the extent of the exaggeration is disrupted....

...Resolution Foundation calculates that windfall revenues will fall by £7bn, which reduces the saving to around £4bn but with the net effect “still substantially positive”....18/
resolutionfoundation.org/publications/t…

...Some in the Treasury, however, using OBR "ready reckoner" rules of thumb estimate the negative impact on windfall revenues will ENTIRELY offset any benefit from lower EPG expenditure in 2023/24 (see the -£12.7bn line for the impact on windfall tax revenues)...19/

...Oxford Economics thinks there will still be a net benefit, but doesn’t put a figure on it.

There’s obviously a lot of uncertainty about windfall tax revenues, but it does seem at least possible there will be some leeway in the near term public finances envelope...20/

...and savings could, in theory, be recycled into extending the household subsidy.

And campaigners would argue this should be done regardless of the public finances impact to stop people facing this profile of spiking bills..21/

...But on the other hand it's worth stressing that these calculations are based on forecasts for wholesale prices.

These prices have been incredible volatile - they could easily spike up again...22/

....Also, the EPG is a universal subsidy - meaning that it benefits the wealthy along with those at risk of fuel poverty.

If there is a lower net cost from the EPG could the benefits not be better used if targeted at those at risk of fuel poverty?...23/

....Anyway, those are the parameters of the debate and some ofthe key numbers.

Hope it's a little clearer & apologies for the long thread!

More on #Newsnight tonight.

BBC2 1030pm

ENDS