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Millions face average energy bills of £2,000 as price cap raised

Emma Lunn
Written By:
Emma Lunn

The energy price cap will go up from £1,277 to £1,971 a year from April, meaning millions of households on default or standard tariffs will pay hundreds of pounds more for their gas and electricity.

Although widely predicted, the hike in energy bills will come as a shock to many households already struggling to cope with the rising cost of living.

Those on default tariffs paying by direct debit will see bills rise by more than half (54%), an increase of £693 (difference due to rounding) while prepayment customers will see an increase of £708 from £1,309 to £2,017.

The price hike will affect 22 million customers, and energy regulator, Ofgem, said the increase is driven by a record rise in global gas prices over the last six months, with wholesale prices quadrupling in the last year.

Further, since the price cap was last updated in August, the current level “does not reflect the unprecedented record rise in gas prices which has since taken place”.

‘Extremely worrying’

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.”

Ofgem added it will tomorrow announce further measures to help the energy market.

Justina Miltienyte, energy policy expert at Uswitch.com said this is the toughest energy price hike in recent memory and brutally comes at a time when other essential bills are rising.

“This situation is even worse for those in fuel poverty, who are already trapped in a vicious cycle of energy debt. It calls into sharp focus just how vital the government support for the most vulnerable households is.

“If you’re worried about getting into debt, it is important to contact your supplier as soon as possible. It’s also worth checking what grants and schemes might be available to help cover your energy bills, particularly if you or someone you know is vulnerable.”

Miltienyte added that the “only saving grace” is that the price rises won’t take hold until April, meaning customers on standard plans will keep their existing rates for the rest of this winter.

“Despite the bill hike announcement, for most people it’s probably best to stay on your supplier’s default tariff for now, unless you are already locked into a fixed deal. It’s important to keep an eye on the market and be ready to fix a new deal as and when they become available,” she said.

What is the energy price cap?

The energy price cap is a limit on the unit rate and standing charge that energy suppliers can charge.

The cap is set by energy regulator Ofgem, and it’s based on how much suppliers need to spend to get energy to your home. It’s calculated using average energy use in the typical home.

Ofgem reviews the energy price cap twice a year to take into account the varying costs of wholesale energy. The idea is this keeps prices fair ensuring costs passed on to consumers reflect legitimate costs suppliers incur to supply energy. It makes a calculation in February with the cap effective from 1 April, and then another calculation in August with the cap effective from 1 October.

Ofgem introduced the cap to try and protect customers from unexpected price rises. However, it’s important to understand that the energy price cap doesn’t set a limit for your total bill – what is capped is how much you can be charged for a unit of energy. Energy is measured in kWh or kilowatt hours.

The energy price cap only affects households on their supplier’s standard or default tariff – those on fixed tariffs won’t be affected. However, if your energy supplier has stopped trading and you’ve been switched to a new supplier, you are likely to be on a default tariff.

Historically, fixed energy tariffs were cheaper than default tariffs. But rising energy prices mean most energy firms are pricing their fixed tariffs with higher unit charges than the price cap, or stopping offering fixed deals altogether. This means many consumers have little choice than to pay higher prices for energy.

In the past six months, the energy price cap has meant energy firms have been unable to pass soaring wholesale energy costs onto customers. This means many suppliers have paid more for energy than they could charge to consumers – this has led to close to 30 energy suppliers going bust. Energy suppliers that have ceased trading include Utility Point, People’s EnergyPfP Energy, MoneyPlus Energy, Avro Energy, Green, Igloo Energy, Enstroga, Symbio Energy, Bulb and Together Energy.

Experts had predicted this price cap review could see a rise in hundreds of pounds. Numerous organisations have warned that a rising energy bills could see millions of households plunged into fuel poverty.  The Joseph Rowntree Foundation called for more support for vulnerable households last month, while Citizens Advice said it had seen a steep rise in people seeking help with energy debts.