UK government's energy price cap could cost £140bn, analysts claim

Experts say final bill will depend on factors including wholesale cost of gas, energy demand and the weather

A protester takes part in an energy bill-burning event in Centenary Square in Birmingham, central England. PA
Beta V.1.0 - Powered by automated translation

The UK government’s move to freeze energy prices for two years could cost as much as £140 billion ($158.55bn) in a “worst-case scenario”, consultants have said.

Modelling by energy research, analytics and consultancy company Cornwall Insight said the bill would depend on several factors, including the wholesale cost of gas, energy demand and the weather.

But the cost of the policy is predicted to be between £72bn and £140bn, it said.

“While the modelled costs of the energy price guarantee across all our market scenarios are clearly large, it is the significant variation in forecasts which jumps out of our report,” said Gareth Miller, chief executive at Cornwall Insight.

“There is nearly £70bn difference between the low and extreme high market scenarios. This reflects a febrile wholesale market continuing to be beset by geopolitical instability, sensitivity to demand, weather, and infrastructure resilience.

“The risk around these factors grows in the second year of the scheme as uncertainty increases with time.

“No one is clear on what the single curve of prices will be, so the government will find it hard to accurately plan for how to cover the EPG expenditure.”

Wholesale gas prices have soared worldwide since Russia invaded Ukraine in February.

The British government’s package will freeze the unit price for energy for the next two years, meaning an average household will pay £2,500 a year.

This figure would have risen to £3,549 under the scheduled price cap before the intervention.

“While this delivers unit-price certainty and lower bills to households than otherwise would have been the case, it leaves the government exposed to electricity and gas prices in unpredictable global commodity markets,” Cornwall Insight said.

The Office for Budget Responsibility — a public body that provides independent economic forecasts and analysis of public finances — will issue its own estimate for the bill in its assessment of the chancellor’s medium-term fiscal plan.

UK Prime Minister Liz Truss vowed to steer the UK “through the tempest” in a speech to the Conservative Party Conference on Wednesday.

“In these tough times, we need to step up,” she said.

“I’m determined to get Britain moving, to get us through the tempest and put us on a stronger footing as a nation.”

The cap was part of the government’s destabilising mini-budget, which unleashed turmoil in the markets after being announced on September 23.

The pound plummeted, falling to its lowest level yet against the dollar, while the FTSE tumbled and the Bank of England was forced to step in to save the pensions system from collapse, all in a four-day period.

Base interest rates, which currently sit at 2.25 per cent, were predicted to soar above 6 per cent next year at one point, leading lenders to pull hundreds of products from the market.

Estimates have since fallen back to 5.5 per cent but it still means significantly more expensive mortgage payments for homeowners in the future, as they are set higher than the base rate.

The average two-year fixed mortgage rate is now sitting about 6.1 per cent, according to comparison site Moneyfacts.

That is the highest level since 2008 and means households are paying the greatest portion of their income on mortgage payments since 1989.

Chancellor Kwasi Kwarteng will reportedly meet executives from high-street banks and mortgage lenders on Thursday to discuss the effect of the turmoil on the mortgage market.

The chancellor is set to question lenders, including Barclays, Lloyds Banking Group and NatWest Group, on their plans.

Updated: October 06, 2022, 8:30 AM
EDITOR'S PICKS
NEWSLETTERS
MORE FROM THE NATIONAL