Energy price cap increase
Ofgem, the UK’s department for regulating energy suppliers, has announced an 80% increase to the energy price cap in the UK. This leads to households facing energy bills of up to £3,549 per year.
Homeowners across the UK are impacted by this news and ultimately will be considering ways in which to save on their monthly expenses.
In this article, we will explain what the energy price cap is, as well as why it has increased and how homeowners may still have the potential to reduce their bills.
What is the energy price cap?
The energy price cap refers to the set maximum amount that an energy supplier can charge for their default tariffs.
This cap will apply to those on a default energy tariff. This includes those accounts paid via direct debit or a prepayment meter. This does not however, refer to the overall maximum amount paid by customers.
The price cap is applied to the cost per unit of electricity and gas used, as well as the maximum standing charge per day for the home being connected to the energy grid.
A high electricity consumption will still equal a higher bill as the account holder is charged for the amount used on top of the other charges.
Even if the amount used doesn’t increase, the overall price of the bill will still go up due to the default amount paid increasing. This is because the standard rate is affected before considering the amount of energy consumed.
Any energy customer with a fixed term or standard variable green energy tariff will not be affected by prices rises due to the price cap rise.
Ofgem price cap increase
The government department responsible for regulating the UK energy suppliers and their prices is the Office of Gas and Electricity Markets – commonly referred to as Ofgem.
Their job is to ensure that consumers are not charged extortionate pricing for their electricity supply. They do this by capping the maximum default price the energy supplier can charge.
They also help to keep the market stable and stop suppliers from going bust by adjusting the price cap according to the supply and demand of the price of gas and other resources.
Ofgem first introduced a cap on the price of default tariffs as a temporary measure, with the amount the cap is set at being reviewed every 6 months. They have now announced further reviews, with the cap now being looked at and adjusted quarterly to quickly adjust to any changes in gas supply prices.
The energy price cap was reviewed in April 2022 and was increased by £693 for approximately 22 million energy customers in the UK.
Any energy customers paying £1,277 per year on default tariffs had their bills increase to £1,971. Any customers with a prepayment meter saw a price rise of £708. This led to an increase from £1,309 per year to £2,017.*
Many news outlets and experts have predicted a potential further increase in the price cap for several months. Ofgem announced the expected increases last week with the typical UK home paying up to £3,549 for their energy per year, starting from October 1st 2022.
Why did the energy price cap increase?
There are several reasons that have caused rising prices of energy in the UK.
One of the main reasons is the 300% increase in the wholesale and import prices of gas compared to the prices at the start of last year. With the Russia-Ukraine war causing supply chain issues for gas, the availability of gas is much lower, and prices have risen massively because of this.
Due to huge price rises at wholesale, 31 energy suppliers were no longer financially viable and had to cease trading between the start of 2021 and now.** The lack of availability of resources mixed with higher pricing was too much for the suppliers to handle, whilst still being profitable.
The price cap increase is directly linked to this situation. To keep the market and UK energy supply stable, Ofgem has repeatedly increased the maximum price that can be charged by suppliers for a default tariff. This allows energy companies to account for paying higher prices for their gas supply and keeps them profitable.
Suppliers benefit hugely from this, whilst unfortunately it is the consumer that will be hit hardest by higher prices. Living in a property in the UK will unfortunately now be far more expensive in terms of energy bills.
UK energy crisis
Crisis is the most appropriate term to refer to the situation with energy supplies and prices in the UK at the moment. There are many households who will now be forced to budget and cut back severely to be able to cover the basic costs of heating and powering their homes.
The cost of living and in turn the cost of energy in the UK, has seen a massive rise over the last year. This affects those who own both commercial and private properties, as either way the energy prices will be the same. Business owners and homeowners alike will be facing much higher costs for powering their properties. Landlords with multiple properties may have concerns that if tenants cannot afford to pay their electricity bills, the responsibility for this could then fall onto them as the property owner.
There are specific support schemes that have been put in place already for bill payers that fall into vulnerable groups, such as those who are disabled or elderly.
These schemes will be further detailed below, but there is mounting pressure on the government to introduce more support for those still struggling. It will be seen over the coming months whether or not any additional support schemes will be developed and put in place.
Why is there an energy crisis?
There are various reasons for the current energy crisis. There have been significant increases in gas prices for both wholesale and import due to high demand and lower supply. The price of fossil fuel has risen sharply in recent months.
With much higher costs to consider, energy suppliers have been forced to increase the prices they charge consumers in order to remain financially viable. A price rise at the source unfortunately equals price rises further down the supply chain.
With Russia cutting off their gas supply to Europe due to the impact of their conflict with Ukraine, gas has become even harder to source. This has led to costs further spiralling.
With all of these factors taken into consideration, it isn’t unreasonable for energy suppliers to need to increase their prices – but it is the consumer who will feel this price rise the most.
With increase upon increase in terms of price, it is the energy customers who will notice a significant impact on their finances.
Below we are going to highlight the best ways to save on your energy bills, to try and avoid financial strain as much as possible.
How can I reduce my energy bills?
There are ways to lower the cost of energy bills – even during an energy crisis. With autumn and winter rapidly approaching, now is the time to think about making changes. Energy consumption is naturally higher during colder months due to the extra need for central heating.
There are simple ways to reduce energy consumption, resulting in lower energy bills. Some easy ways to start on lowering energy costs include:
- Not leaving electrical appliances and equipment plugged in or on standby when not in use
- Adding insulation and draught proofing windows and doors in the property to reduce the need for heating
- Positioning furniture strategically (not blocking radiators) to improve heat circulation
- Not heating or lighting empty rooms where possible
- Replacing standard lightbulbs with energy efficient ones
- Switching out appliances for ones that are specified as ‘energy efficient’
- Avoid or reduce use of appliances with high energy consumption such washing machines
- Take shorter showers and avoid baths to reduce water use
Although some of the above are minor changes, they can lead to savings long term. This is especially true if multiple changes are put in place.
The national grid has also proposed a scheme in which if consumers avoid using energy at peak times, they will be entitled to discounts on their energy bills. This is applicable to the use of high consumption appliances e.g. washing machines or tumble dryers. The peak times for energy usage specified are 5PM-8PM***.
Currently this proposal is still under review and news about whether Ofgem will approve it should come within the next few weeks. If approved, households who take advantage of the scheme could stand to make significant savings.
Help with energy bills
Over the last year, the government have introduced several schemes and payments to help with the rising cost of living in the UK. These are for the most part targeted at vulnerable members of society who may need additional support, such as those who are disabled or elderly.
With higher energy prices, extra support that can be used towards energy bills could be very useful for many UK households, if they are eligible. Some of the support available includes:
- £650 cost of living payment: those in receipt of certain benefits or tax credits will be eligible to receive a £650 payment to help with rising bills
- Winter fuel payment: anyone born on or before 25 September 1956 and living in the UK for at least one day during the week of 19-25 September 2022 (the qualifying week for this benefit) will qualify for a winter fuel payment. Cold weather payments such as this can be vital support for those who are vulnerable
- £300 pensioner cost of living payment: an extra payment that is available to any pensioner household already in receipt of the winter fuel payment
- £150 disability cost of living payment: the government is now providing an additional £150 payment to those in receipt of certain disability benefits to help with costs specific to their needs
The government will make these payments directly to eligible households, so anyone entitled will be paid automatically.
Additional funds such as those available from these schemes will be very useful for helping towards rising energy bills.
Any business owners who own their commercial property could also potentially benefit from the Energy Intensive Industries (EII) compensation scheme, if the business relies on high usage of energy. For further details on this scheme and whether your business may be eligible, check the gov.uk website.
Energy bills council tax rebate
A council tax rebate has now been introduced and made available in response to rapidly rising living costs in the UK. These can be used as additional support to help pay for council tax billing, increased energy bills and other expenses.
Any home in England, Scotland or Wales that is in council tax band A-D, is now eligible for a £150 council tax rebate to help pay for expenses related to the cost of living crisis. There will be a proportionate payment supplied to eligible households within Northern Ireland. This will be paid direct to the bank account/bank details associated with the household council tax account.
Approximately 28 million households in the UK could also stand to benefit from an overall support scheme worth up to £550. This is due to the government pledging an additional £15billion to an energy bill rebate package. This will be allocated via a discretionary fund controlled by local authorities.
*according to Ofgem figures
**according to Forbes Advisor
***according to BBC News