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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. 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 6 months. Whilst consumers are left reeling by the huge increase that happened on 1st April, UK energy industry watchdog Ofgem is due to announce another change in 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 2021. However, all that was based on global energy costs before the Russian invasion of Ukraine. Since then costs have gone even higher, and experts including Martin Lewis and the OBR (UK Government budget finance watchdog) expect a further rise of 40% in the Autumn. That could take typical annual bills to a shocking £2800

An energy price shock for customers on fixed deals

A typical energy customer with average usage, who took a 12 months fixed deal a year ago when prices were much lower, could experience a whopping 100% increase in their energy bills when their fixed deal ends – that’s double what they were previously paying.

This means that a typical gas and electricity bill of £1,024 per year, will rise to £1971, £950 more!

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 price of gas has increased by 6 times since last Summer. This is the wholesale price paid by suppliers to buy the gas they need to sell on to energy customers. Such a sudden and large increase is extremely unusual.
  2. Energy suppliers have been losing millions of pounds as a result. Because consumers have fixed deals and prices in place, it has been costing much more to buy that gas, then they receive from home energy customers.
  3. Energy companies 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 new deals, as these new deals would lose money.
  4. A record number of small energy firms 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).
  5. 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 has now happened with the recent 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?

  1. Stay put – for now
    • 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.
    • Keep your eyes peeled for new deals
      • We expect more competitive fixed tariffs to return – what isn’t clear is when, although wholesale costs have fallen significantly since the initial spike following the Russian invasion. 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.