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UK energy price cap to rise 80% to £3,549 this October

·Finance Reporter, Yahoo Finance UK
·10-min read
A general view of a household energy bill displayed on a mobile phone held next to a gas hob. Families across Great Britain will find out on Friday how tough energy bills will be this winter but they may have to wait to discover what the Government will do to help Picture date: Thursday August 25, 2022.
Energy bills are set to soar in the coming months. Photo: PA

Millions of UK households will see their energy bills rocket as the price cap is hiked to £3,549 from October with regulator Ofgem announcing an 80% energy increase that risks pushing more families into fuel poverty this winter.

Winter energy bills are set to be more than triple what they were a year ago, costing more than 11% of a household's median disposable income, according to the Office for National Statistics (ONS).

The new cap level isn't the maximum anyone will pay. The price cap sets a limit on the rates you pay for each unit of gas and electricity, so UK households that use more, will pay more.

“We know the massive impact this price cap increase will have on households across Britain and the difficult decisions consumers will now have to make. I talk to customers regularly and I know that today’s news will be very worrying for many," Jonathan Brearley, CEO of Ofgem, said.

Energy bills continue to rise.
Energy bills continue to rise.

Ofgem said the increase in energy bills reflects the continued rise in global wholesale gas prices, which began to surge as the world unlocked from the COVID pandemic and have been driven still higher to record levels by Russia slowly switching off gas supplies to Europe.

"We are working with ministers, consumer groups and industry on a set of options for the incoming prime minister that will require urgent action. The response will need to match the scale of the crisis we have before us. With the right support in place and with regulator, government, industry and consumers working together, we can find a way through this," Brearley added.

Read more: Energy bills: How to cope with soaring prices

Ofgem also warned that the market for gas in winter means that “prices could get significantly worse through 2023”.

The regulator isn’t giving price cap projections for January, when the cap will next change, “because the market remains too volatile”. However, Ofgem's boss told BBC's Radio 4 that "prices look like they will continue to rise".

As well as lifting the price cap by 80%, Ofgem on Friday also strengthened the rules around direct debits to ensure suppliers set them at the right level.

"The changes will stop suppliers from building up excessive customer credit balances and using them in a risky way as working capital," it said.

The escalating energy crisis may cause more pain for households than the 2008 financial crisis, according to consultancy Baringa Partners.

What is the energy price cap?

The price cap limits the rates a supplier can charge for their default tariffs. These include the standing charge and price for each kWh of electricity and gas — the units your bill is calculated from.

It doesn't cap your total bill, which will change depending on how much energy you use.

The price cap was introduced on 1 January 2019 by regulator Ofgem, with the aim of preventing the millions of households on certain expensive variable tariffs from being ripped off.

Read more: Over a third of UK firms to hike prices amid surging energy costs

The cap does not apply to fixed rate deals, for which quotes are now almost always far higher than what you would pay on a variable tariff.

Standing charges — the daily rate billed to customers regardless of how much energy they use — are also limited by the cap.

When will the price cap be updated?

Ofgem used to update the energy price cap twice a year. However, it has recently moved to update the cap four times a year from October.

That means the cap is set to change in January, April, July and October.

How is the energy price cap calculated?

The price cap is based on a range of costs that energy suppliers face. These include:

  • Wholesale energy costs — these make up around half of your bill, and change depending on market conditions.

  • Network costs — the cost of building and running the pipes and wires that bring energy to your home. They vary by region, so there are different price cap levels for different areas.

  • Operating costs — the costs that suppliers incur for administration like billing or meter reading services.

  • Policy costs — relating to government initiatives, such as saving energy or reducing emissions.

There is also a profit margin, so that suppliers can reap a return.

Does the price cap vary from person to person?

Caps vary by region, meaning households in areas where electricity is more expensive to transport, such as the South West, will pay more on their standing charge than those living in London.

The cap is lowest for those paying by direct debit. This payment method is cheaper for suppliers, so this is reflected in the cap.

Read more: British Gas to donate 10% of profits to struggling customers

The cap is higher again for those who pay quarterly, or by cash or cheque, to reflect the costs that energy companies incur for processing this type of payment.

If you prepay for your energy, the price cap is set higher. Ofgem says it costs more to bill customers with prepayment meters, compared to those paying by direct debit.

James Cooper at Baringa said: "The impact to society will be higher than the 2008 crash in terms of the impact on households.

"We're now moving into territory where a majority of households are placed into debt or a very fragile financial position."

Energy poverty is defined as when a household must spend more than 10% of its income on fuel.

“The increase in the energy price cap will raise the peak in inflation to levels not seen for over a generation. Poorer households will suffer great hardship as a result, which will require a substantive fiscal intervention. And there will be more pressure for Bank rate to increase, particularly if it is felt that the Bank of England has to re-establish credibility against a backdrop of increasing political interference," Jagjit Chadha, director at NIESR, said.

Read more: Energy bills direct debit: What Ofgem announcement means for consumers

"Economic and political circumstances have changed markedly from the Spring and it is critical that we move to a substantive fiscal event in the Autumn, incorporating a re-assessment of the new government’s economic priorities and the prospects for the UK economy in a turbulent world," he added.

Energy costs could eventually drain as much as 17% of household income next year if the government doesn’t give more help, based on price-cap estimates from Cornwall Insight.

Energy bills are set to soar
Energy bills are set to soar. Chart: Yahoo

Customer debt is already on the rise. In the summer, people usually pay down debt built up during winter, when they use more energy.

“Workers across the country will have woken to the news that they will need to pay 80% more for their energy bills at a time when they are already are already facing a record 3% fall in real wages. In particular, it is a hammer blow for the 6.2 million people in severely insecure and low-paid work who have already been struggling to make ends meet," Ben Harrison, director of the Work Foundation at Lancaster University, said.

“The new prime minister must grasp the severity of this situation and bring forward an Emergency Budget to give workers across the country support as we head for a living standards crisis that without intervention, will only get worse.”

“When it comes to preparing for autumn and winter, start now. If you pay for your energy by cash or cheque, call your supplier and find out how much you can save by switching to Direct Debit. Not only can it save you money, but it will help spread out your payments over a year rather than peaks in bills in the winter months," Stephen Murray, energy expert at MoneySuperMarket, said.

"If you haven’t got a smart meter, get one so you can use the in-home display unit to see how much energy appliances use and real time costs.

"This can help spot where you can make changes that save you money. Most importantly, having a smart meter means your bills will be as accurate as possible. If you don’t have one, make sure you’re submitting regular meter readings."

“If you’re struggling to pay your energy bills, you’re not alone. The first step is to contact your supplier to find out what support is available," he added.

Read more: Ofgem plans quarterly review of price cap to prevent unfair higher energy bills

Helping households by freezing the price cap at the current level for two years would require about £100bn, according to Keith Anderson, chief executive officer of Scottish Power.

Which? has warned the government needs to raise its energy bills discount by at least 150% or risk pushing millions of households into financial distress.

The consumer group said the government’s financial support for all households must increase from the current £400 to £1,000 — or from £67 to £167 per month from October to March.

The existing support package is inadequate to protect living standards for those on the lowest incomes, it said.

No immediate extra help will be announced by Boris Johnson’s government, with major financial decisions being postponed until either Liz Truss or Rishi Sunak is in No 10 after the Tory leadership contest.

The Resolution Foundation has warned that UK households “simply” do not have the money to pay their energy bills as these are set to cost around £2,000 more this year than last year.

British Gas will donate 10% of its profits to help its poorer customers manage rising gas and electricity bills for the “duration of the energy crisis”.

“While Putin is driving up energy prices in revenge for our support of Ukraine’s brave struggle for freedom, I am working flat out to develop options for further support. This will mean the incoming prime minister can hit the ground running and deliver support to those who need it most, as soon as possible,” chancellor Nadhim Zahawi, said.

Watch: Why are gas prices rising?