Energy price cap increase announced: what does this mean for your energy bills?
The new energy price cap has been announced by Ofgem – the figure increasing from £1,277 (for those on a default tariff paying by direct debit) to £1,971, a whopping 54% rise. Prepayment customers will see an increase of £708 to £2,017.
Effective from April this year, it’s estimated that 22 million households will be affected.
According to experts, a further rise is predicted for October 2022. Dr Craig Lowrey, Senior Consultant at Cornwall Insight said:“Our prevailing forecast of the Winter ’22-23 indicates a further increase to more than £2300 per year, but we note that there are a number of legislative and regulatory proposals in development which could affect both this figure and that for Summer ‘22.”
The increase is a response to the current energy crisis, caused in large part by increased demand and lower supply, which has also seen over 25 UK energy firms go bust since August 2021.
Jonathan Brearley, chief executive of Ofgem, said: “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.
“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.
“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”
What is the energy price cap?
The price cap, introduced in January 2019, was meant to protect customers from big bill hikes.
The cap sets a limit on how much domestic consumers can be charged per kWh of gas and electricity on standard variable and default tariffs, and those using pre-payment meters. It also sets a maximum daily standing charge, which is how much you pay for power to be supplied to your home.
Those on a standard variable tariff (SVT), where the price per unit of energy can change each month depending on the wholesale price of energy (which has skyrocketed amid the energy crisis), will be feeling the pinch of those increased market prices.
The cap does not affect those on fixed rate tariffs. Customers who have chosen a standard variable green energy tariff that Ofgem has exempted from the cap, or business users.
In the past, hundreds of pounds could be saved by shopping around for the best energy deal, but spiralling costs means there are no good fixed-rate deals to be found right now.
How does the price cap work?
The cap can rise or fall, depending on the movements in the wholesale energy market. When prices go up, suppliers are able to reflect that – up to a certain point – in their customers’ bills, but it also forces them to pass on any savings they make when prices fall.
The energy regulator Ofgem reviews the price cap twice a year, in summer and winter, with any changes coming into effect in either April or October. The decision is announced publicly two months before.
Ofgem gives the price cap as a yearly amount for a typical household.
However it is important to note that is not a maximum amount that you will pay for your energy bill – that depends on how much you use. If you have a large drafty home and a big family, you will pay more than the current figure.
What should I do if my fixed rate deal is coming to an end?
Image credit: Jeremy Baile
In the past, the best advice to save money on your energy bills was to shop around using a comparison site to find another cheap fixed rate deal. However, these deals have disappeared from the market and currently the cheapest you will find is around 56% more than the energy price cap.
According to MoneySavingExpert.com, the cheapest fix on the market is around £1,730 a year for typical usage. That’s more than double the figure from November 2020 of just £830 a year.
For most people, the best advice is to do nothing. Your provider will roll you on to their standard variable tariff, which means you will be protected by the price cap. Unlike a fixed rate tariff, you are not locked into a contract with a SVT, so should prices fall, you can move.
While you can’t switch, reducing how much energy you use will help to keep your bills as low as possible.
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