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Energy price cap: why do energy bills keep going up?

Energy bills are set to rise again. Following April's £700 increase in the price cap, experts are predicting that the cap will rise further still in October 2022 – this time by an eye watering £1400. We look at why the cap is rising so fast and how it will affect almost all UK households.

The energy price cap is reviewed every 3 months. Whilst consumers were left reeling by the huge increase that happened on 1st April, UK energy industry watchdog Ofgem is due to announce another change in late August that will take effect on 1st October. The cap sets the maximum amount that an energy supplier can charge customer who are on a standard variable tariff. The majority of energy firms price their standard variable tariff (also known as the standard rolling tariff, SVT, or flexible tariff) either at that price level, or a fraction under.

With approx. 80% of UK energy customers on a standard tariff at the moment, changes in the price cap level have a big impact on household finances.

It’s important to know that the cap is not really a cap on the total amount your bill could reach; it is a cap on the £ per unit, so the more you use the more you will pay. However, when talking about the cap, and especially when predicting where it might go, experts tend to do so by expressing what a cap would mean for an average home, as this makes it more real and easier to understand. And by “average home”, this means a home with average usage levels of both electricity and gas.

Leading experts make their predictions

Ofgem’s latest cap change saw the price cap jump by £693 per household from 1st April, 2022, to an eye watering £1971 per year for an average home’s energy bill. This record breaking rise was on top of the £200 jump that came into effect in October 2021.

However, all that was based on global energy costs before the Russian invasion of Ukraine. Since then costs have gone even higher, and for months experts including Martin Lewis, the BBC and energy experts have been predicting a further rise of around 70% in the Autumn.

They predict that on 1st October 2022 the cap will increase to an unprecedented £3420. By January 2023 the average bill for customers on SVT could exceed an unbelievable £3850 per year with even worse to come from April 1st 2023 - and the market is still rising!

Energy price cap: Staggering chart shows how much YOUR bills could rise AGAIN in 2022 | Personal Finance | Finance | Express.co.uk

Why are energy bills so high and still rising?

We haven’t seen energy bills go up like this in a generation. You might wonder why experts say they’ll increase again, and why they are so sure that it’s going to happen?

In the UK energy industry, many things have been changing at an incredible speed.

Here’s a summary of the main events since September 2021: -

  1. The cost of wholesale gas has increased by a multiple of 8 since Summer 2021. This is the wholesale price paid by suppliers to producers to buy the gas they need to sell on to energy customers. Such a sudden and large increase is unprecedented.
  2. Energy suppliers have been losing millions of pounds as a result. Some consumers still have fixed deals and prices in place, and more importantly the price cap has prevented suppliers from raising prices at the same rate as the wholesale costs they have incurred. Whilst the cap has nearly doubled, and is set to reach treble the level of early 2021, it hasn’t gone up by 8 times – so it has been costing suppliers much more to buy that gas, then they receive from home energy customers.
  3. Meanwhile energy producers have been raking it in! The higher wholesale prices have meant much higher revenues for the same volume of gas (and oil) produced – hence all the pressure on the Government to introduce a windfall tax. So some energy companies are going bust, others are making huge profits – it’s helpful to distinguish between suppliers and producers rather than just talking about “energy companies”.
  4. Suppliers stopped offering low price deals, and for a while, all deals. Bigger firms haven’t wanted to acquire new customers, or move existing customers to fixed deals priced below the cap, as these new deals would lose money.
  5. A record number of small energy suppliers have gone bust. 23 small and mid-sized energy firms have collapsed so far, leaving a total of 2.7m customers forced to join a new supplier. Bulb Energy has been placed into ‘special administration’, pushing a further 1.7 million customers in limbo. More companies could follow, with a third of remaining small energy firms at risk of collapse (The Telegraph).
  6. Taking on customers from failed companies is expensive. Transferring customers from bankrupt energy firms to more stable ones is a complex process. Energy companies have incurred additional costs that they hadn’t necessarily expected six months ago.

What’s going to happen next to energy bills?

The energy price cap is designed to help protect customers from these high costs, as it limits how much firms can charge. And during Autumn and Winter 2021 it did provide some protection. But in doing so it meant that energy suppliers who have to buy energy on the wholesale market were heavily loss-making.

However, the cap is calculated using a formula based on wholesale market costs, so eventually the costs will feed through to consumers bills – which started happening with the 1st April cap increase to £1971. And what’s worse is that industry analysts have reviewed the factors that might influence the next price cap decision (which include even higher energy costs since the Russian invasion of Ukraine), and have concluded that Ofgem is likely to increase the price cap again in October 2022.

Why is the jump so big, and why all in one go?

The increase is to help energy companies recover from this period of higher costs and keep the remaining firms operating, in an effort to minimise further disruption to customers if more firms go bankrupt

Unfortunately, despite the current cap softening the blow, the impact has been delayed rather than removed, and the customer will always have to pay – eventually.

What does all this mean for UK consumers?

It’s likely that the best thing to do is to stay where you are and not change your tariff just yet . This is because fixed deals – usually offering good value over the long term - are still priced high, with no/low savings in the short term.

As the cap increases even further in the Autumn, suppliers will almost certainly reset the SVT at this new higher level, so if you take no action you will end up paying a huge amount more. However, we expect that we will reach a point later in 2022 where there are new fairer fixed deals for existing customers which are below this new, higher cap level

Deals might not look attractive at first, but they might deliver savings when compared to staying on the standard tariff as that rises later this year