Energy price guarantee: many households will pay more than £2,500

Some people mistakenly think the energy price guarantee means all bills are capped at a maximum of £2,500, warns John Fitszimons.

As expected, one of Liz Truss’s first acts as Prime Minister was to introduce a support scheme aimed at helping households deal with rising energy bills.

The energy price guarantee has replaced Ofgem’s energy price cap, and has frozen the unit cost of our energy until 2024.

As a result, the typical household will pay £2,500 for their energy use per year, rather than the £3,549 the energy price cap was set to be raised to from 1st October.

It’s a welcome, albeit somewhat mysterious intervention.

Millions of households across the country have been concerned about how they were going to meet these ever-rising bills, and now have some level of certainty, though there remain big questions around how it will actually be paid for given the Government’s refusal to consider a windfall tax on energy firms.

However, there do seem to be some misconceptions about just how the energy price guarantee works.

I’ve seen and heard plenty of people ‒ including on news reports ‒ suggest that the guarantee means that no one will pay more than £2,500 per year for their energy.

This is a dangerous misunderstanding of how the guarantee works, though. The support scheme does not freeze energy bills at all, but rather the unit cost of the gas and electricity we use. 

It means that we are all paying the same for each unit of energy we use, but that doesn’t mean that the overall bills will be the same.

You pay for what you use

Instead, the size of your energy bill will be determined by how much energy you use. The £2,500 figure is simply a guide, based on typical energy usage by a typical household. 

If you happen to have a larger home, then you will end up paying substantially more.

And even if you have a small home, but have the heating on all the time, then again you’ll end up with a much larger energy bill.

Being complacent

There is a real danger that comes from this misconception about the energy price guarantee, if people believe that, irrespective of their own habits, their bill will not pass £2,500.

Don’t get me wrong, it’s still a vast amount of money, but viewing this as a genuine cap could easily mean that people are ill-disciplined about their own energy use, such as using the heating constantly, running the dishwasher when it isn’t full, and the like.

That complacency could result in their energy bills eventually being much higher, potentially at unaffordable levels.

Making changes

By contrast, even for larger households there will be ways to ensure that the eventual energy bill does not reach as much as £2,500.

Being disciplined with our energy use will make a real difference. Yes, it’s a bit of a cliche to suggest sticking on a jumper rather than the heating when it starts to get chilly, but it isn’t entirely off base either.

The reality is that the energy price guarantee still sets energy prices at an incredibly expensive level.

Sure, it’s not as bad as the £3,500 typical households would be paying under the energy price cap, but it’s still more than double what they were paying at the start of the year.

Making changes to the way that we use energy, therefore, has to be a priority. 

There are various measures that we all ought to be considering here. Improving the energy efficiency of our homes is paramount ‒ the less energy we have to use to keep our home warm, the less it will end up costing us.

Therefore it’s a good idea to review just how efficient your various appliances are.

I know from replacing my own boiler a year ago that it has made a tangible difference to our energy use, for example, while blocking draughts and installing energy-saving lightbulbs are also worthwhile steps.

Keeping bills artificially low

Another factor to bear in mind is the energy grant that all households will be receiving, which is worth £400.

The grant will be paid in six instalments from October, but it won’t be paid directly to us. Instead, it will go to the energy suppliers, in order to essentially give us a discount on our energy costs.

Again, this is welcome support, but it risks creating a false sense of security. Our bills will be kept artificially low ‒ or rather, lower than they would normally be ‒ because of these payments during the most energy-intensive period of the year. 

This too could lead to people not being sufficiently disciplined with their energy use, resulting in far higher bills down the line.