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Energy costs are increasing fast – here’s why and what to do

The cost of energy for everyday consumers is set for a second huge increase in 2021, mainly due to a surge in demand, rising wholesale costs and global factors. Here is why and how energy prices are set to increase and what you can do to protect your household finances.

In 2021, UK energy customers have already seen a huge jump in prices. On 5th February, the energy regulator OFGEM announced it is raising the ‘energy price cap’ - which increases the maximum amount customers can be charged for gas and electricity - by nearly £100 a year. Over 10 million homes have seen bills go up since the increase came into effect in April.

A second OFGEM announcement is expected in August and all the signs point to it being another massive increase which will hit consumers hard.

This information explains why there is set to be an increase in the energy price cap, what it means and what your options are to save money.

The price cap and what to expect

The February 2021 increase in the energy price cap was a whopping 9%. For a customer on the standard variable tariff (SVT) with a medium sized household and average usage, this meant an increase of £96 to every household’s bills.

If, as Ismybillfair expects, the energy price cap increases further in August’s announcement by at least 9%, this will cost customers an additional £94. That’s a huge £190 increase within just 6 months.

These higher prices will apply to ‘default’ tariffs; this is where a customer hasn’t made a recent ‘active choice’ about their tariff. This includes the most common Standard Variable Tariff (SVT) or fixed default tariffs. It doesn’t apply to a fixed tariff a customer has actively chosen. If you’re currently on a fixed tariff, you’ll roll onto this high-cost default tariff when your fixed term period ends - unless you take action.

Why are prices going up even more in 2021?

The driving factors are largely the same ones which led to the February increase. Firstly, the wholesale costs of providing energy are increasing. Having originally dipped at the start of the COVID-19 pandemic when large sections of businesses stopped work altogether, costs are now increasing as countries start to recover. This is due to higher: -

The regulated energy market in the UK means that consumer prices go up and down in line with wholesale costs. The table below shows how wholesale electricity costs have been rising June 2020. The wholesale price is closely tracked by the energy price cap.

Prolonged strong demand year-on-year has been fuelled by unseasonably cold weather in April/May.

Supply side factors include lower supply from Russia, lower output from renewable sources (especially wind) and a risk premium attached to lower storage levels.

Source: EDF Power Market Webinar 5 th May 2021

In addition to supply and demand factors, there is an increasing number of customers who are unable to pay their bills. As a result, energy companies have rising amounts of debt. Part of OFGEM’s remit is to help prevent energy companies from going out of business; raising the price for those who are able to pay lowers the risk of energy companies failing.

Don’t delay and fix your price – without having to switch

Energy companies have started to adjust their offers over the last few weeks, withdrawing their most competitive tariffs from the market. As costs are rising fast with no signs of slowing down, waiting for a better offer that doesn’t come will cost you more in the long-run.

79% of people would rather get a cheaper deal from their current energy company, than have the hassle of switching supplier. Whilst you can’t protect yourself entirely from these increases, as your overall bill is likely to go up whoever you’re with, you can make sure you’re on the best value tariff with your current supplier. This means you making an active choice to ensure you don’t end up on a high-cost default tariff. Fixing your price for a period of time creates peace of mind and helps to protect against further price increases.

How Ismybillfair can help:

Prices are rising fast in 2021 and the worst thing you can do is to sit back and wait to see what happens. You deserve to make an active choice and avoid the worst of these increases. We’re here to help keep as many pounds in your pocket as possible.

Check my Energy bill

Alex Perrin
Co-founder and CEO, ismybillfair.com