Price cap freeze could cost between £72bn and £140bn

The data in its new Counting the Costs report shows a near doubling of the forecasts between the best and worst case scenarios. Based on the market base of wholesale energy prices from 28 September 2022, the total cost of the freeze will be worth around £89bn. 

The EPG, announced on 8 September and coming into force at the start of this month (October), means UK households will pay up to an average of £2,500 a year on their energy bill for the next two years. This comes in addition to the announced £400 energy bills discounts for all households. 

According to Cornwall Insight, while this move delivers unit price certainty and lower bills to households than would have otherwise been the case, it leaves the government exposed to the unpredictability of gas and electricity prices in the current global commodity markets. 

The figures by the energy market researchers outline four scenarios for the actual costs of energy for consumers. These are based on a mix of recent market price expectations and its own fundamental models. 

Reflecting on the research, Cornwall Insight chief executive Gareth Miller said of the modelled costs of the EPG, the significant variation of the forecasts jumps out from the report. He explained: “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. Fortune befriends the bold, but it also favours the prepared. 

“The large uncertainties around commodity markets over the next two years means that the government could get lucky with costs coming out at the low end of the range, but the opposite could also be true. 

“In each case, the government may find itself passengers to circumstances outside its control, having made policy that is a hostage to surprises, events and volatile factors. That’s a difficult position to be in.” 

Miller went on to recommend that the government could use the next few months to develop “more targeted energy support policies for households”. He added: "Politically there doesn’t need to be a decision to migrate to these schemes right away. 

“The government could set review points for the universal scheme to assess whether it should be continued or transitioned, working up and consulting on targeted options in the meantime. This is very similar to the approach they are taking on business energy support and recognises the wide range of possible price environments that could play out.

"Alongside this, there is the opportunity still to drive simple changes in behaviour to reduce energy demand, a lever that could and should be pulled now which could reduce the pressure on prices more broadly, helping both households and the public finances. 

“This would also create some financial capacity to extend more sustainable support should markets not revert to pre-crisis prices after the two years is up, which is certainly what our fundamental energy price models suggest may happen.

“A week is a long time in politics as we have just observed, but two years is an age in commodity markets, armed conflict and geopolitics. In this environment, flexible and durable policies, with pressure valves and elastic coverage, will be more sustainable than rigid and universal ones.”