Energy regulator Ofgem has increased the energy price cap, which would have meant households faced average bills of £4,279 from the start of 2023, up from £3,549.
Households, however, will not pay this amount as the government’s support package means average bills will be £2,500 from last month, and rise to £3,000 from April.
The price cap will rise to £4,279 from January, meaning the government must pay nearly £1,800 per house over the course of the year after limiting household bills to £2,500 under its energy price guarantee.
There is no cap on the actual bill you could pay. Energy is charged per unit, so those who use more can spend more.
Ofgem's announcement means the government action will save typical households around £1,800 a year, compared with the level they would have needed to pay under the regulator's cap.
But the government will have to pay nearly 21% more towards the average household energy bill from the start of next year.
Experts at energy consultancy Auxilione estimate the new cap will cost the government around £15.1bn to subsidise household bills between January and March.
Chancellor Jeremy Hunt announced in his Autumn statement that the energy price guarantee will rise from £2,500 to an average £3,000 a year from 1 April until the end of March 2024.
Craig Lowrey, a principal consultant at energy consultancy Cornwall Insight said: “The energy price guarantee (EPG) will shield consumers from the January price cap of £4,279 announced by Ofgem today, however the rise will be concerning to the government, who will be shouldering the billions of pounds needed to compensate suppliers the difference.”
He added that the price cap is likely to remain high from April, at a little over £3,900 for the average household. Those who use more energy than the average will pay more.
It means the government could end up paying around £42bn over the 18 months it has promised to support households with their energy bills, despite the support becoming less generous from April, Lowrey added.
Rocio Concha, director of policy and advocacy at Which?, said: “The news that the energy price cap will hit £4,279 from January will be hugely worrying for consumers but they should remember that their bills are protected against this price increase by the government’s energy price guarantee scheme.”
She added: “Which? is also concerned that hundreds of thousands of customers on traditional prepayment meters have not yet claimed the government support that is available.
“Energy firms and the government must work to understand why so many Energy Bill Support Scheme vouchers have not yet been redeemed, and ensure that customers on these prepayment meters — who are more likely to be vulnerable and on lower incomes — are able to access this vital support.”
The price cap, which has been in place since 2019, is based on wholesale rates and dictates what energy firms can charge.
Average household bills were limited to £1,277 a year ago, under Ofgem’s price cap.
Jonny Marshall, senior economist at the Resolution Foundation, said: “Today’s price cap announcement illustrates just how much support the government is providing with energy bills this winter — around £630 over three months for a typical bill payer.
“The £16bn cost to the Exchequer is eye-watering, but a price worth paying in order to avoid an already acute cost of living crisis getting dangerously worse over the cold winter months. This is highlighted by the extra support costs needed for families in badly insulated properties, coming at a cost to the government of £200 per home.
“Support with energy bills is due to be massively scaled back next year. But with future gas prices highly volatile, we’re unlikely to have heard the last word on how households are supported through this crisis.”
The next quarterly price cap update will be on 27 February 2023.