Energy costs have rocketed to record highs, meaning much higher bills for all customers. Find out why, and what you can do to protect yourself.
The surge in energy bills has been largely attributed to the significant increase in wholesale gas prices. The demand for energy worldwide soared as the global economy recovered from the impact of the COVID-19 pandemic. Additionally, concerns over global energy supply escalated when Russia invaded Ukraine in early 2022. These factors created an environment of high wholesale prices, which subsequently impacted domestic energy bills.
To address the situation, Ofgem, the regulatory body, adjusted the energy price cap. In October 2022, the price cap was raised to £3,549 per year for an average household paying by direct debit. Further increases occurred, and by January 2023, the cap reached £4,279 per year. This rise in the price cap, which was three to four times higher than in previous years, not only affected energy bills but also led to increased costs for food and other consumer goods due to the reliance of all industries on energy. This phenomenon has been referred to as the "cost of living crisis."
To alleviate the financial strain on households, the government introduced the Energy Price Guarantee (EPG). This initiative froze domestic energy prices at £2,500 until the end of June 2023. Effectively, the government compensated for the difference between the EPG level and the price cap.
It is important to note that the figures mentioned above represent average bills based on average usage. Individual households consuming more energy than the average will experience higher bills. In reality, there is no absolute cap on energy costs.
Wholesale energy prices reached their peak in August 2022, with gas costs almost 20 times higher than before the crisis. However, since then, there has been a significant decline in wholesale costs due to two primary factors. First, the demand in Europe decreased, driven by high bills, prompting households and industries to adopt energy-saving measures. Second, Europe diversified its gas sources, notably relying on the United States and Qatar. As Europe reduced its dependence on Russian gas, the wholesale markets became less vulnerable to supply risks associated with geopolitical tensions.
Source: Octopus Energy
The price cap, which continued alongside the EPG, is determined based on wholesale costs over a specific period. Therefore, there was a time lag between the reduction in wholesale costs and the decrease in the price cap. Nonetheless, in April 2023, the cap fell to £3,280 and is set to decrease further to £2,074 in July. As a result, the Energy Price Guarantee will no longer be applicable, and the price cap will now serve as the primary mechanism to limit domestic energy bills, as it will be lower than the EPG level.
Again, it is crucial to remember that these figures are based on average usage. Your actual bill will vary depending on whether your energy consumption is higher or lower than the average household. As a general guideline, with the cap being 17% lower than the EPG from July onwards, you can expect to spend only £83 for every £100 you currently spend on energy.
Given the decreasing price cap, it may be a suitable time to consider fixing your energy deal. The new cap level of £2,074 may enable some suppliers to reintroduce fixed deals to the market. However, it's essential to keep in mind that the energy market is constantly evolving, and the situation in Ukraine remains uncertain. Therefore, some individuals may prefer the stability of a fixed deal, especially if it is priced at or even below the cap level.
Determining whether a fixed deal or a standard variable tariff will save you money in the long run can be challenging. It is crucial to carefully weigh your options and stay updated with energy market news to make an informed decision.
Consider the duration of the fixed deal when making your choice. Most deals typically last for 12 or 24 months. Keep in mind that during this period, the price cap may rise or fall based on market conditions. Therefore, consider how long you are comfortable being locked into a fixed deal.
Stay informed about the market conditions and regularly check your bills at websites like ismybillfair.com. Remember that despite the falling prices, the new price cap still results in households paying approximately double the amount they did before the energy crisis in autumn 2021.
When assessing energy deals, don't solely focus on the direct debit amount. The monthly payment through direct debit is usually an estimate based on your projected annual usage and may not reflect the actual cost. It is essential to examine the unit price and standing charge to understand how much you will be charged for your energy consumption and how it differs from your current arrangement.
The price cap will undergo further changes on October 1st and January 1st, 2024. While the future is uncertain, experts currently predict a slight decrease in October, followed by a rise in January. Considering this forecast, securing a fixed deal from your supplier at the cap level appears to be a favorable choice, providing peace of mind for 12 months. If you are offered a deal below the cap level, that would be even better!
In summary, as energy prices fluctuate and the price cap decreases, it is crucial to evaluate your energy options carefully. Understanding the pros and cons of fixed deals versus standard variable tariffs, staying informed about market conditions, and comparing different energy plans will help you make the best decision for your household.
Co-founder and CEO, ismybillfair.com