Energy bills: The UK energy price cap hiked by 54%

UK energy regulator Ofgem has announced that the energy price cap will rise by a whopping £693 on 1 April. The energy price cap, which restricts how much energy suppliers can charge, will increase for 22 million customers across the UK.

If you’re on a standard default tariff and pay for your fuel via direct debit, then you will see an increase of £693, from £1,277 to £1,971 per year, on average. Alternatively, if you’re a prepayment customer, you will see an increase of £708, from £1,309 to £2,017.

The new price cap announcement represents the second major increase in energy bills in the last six months. Campaigners fear that it will intensify the UK’s cost of living crisis, pushing millions of households into fuel poverty.

How the government plans to help

Following Ofgem’s announcement, Chancellor of the Exchequer Rishi Sunak delivered a statement to the House of Commons. In it, he announced how the government will help struggling households respond to the ongoing energy crisis.

In doing so, he said that the government will provide a flat £200 rebate on domestic energy bills on 1 October. Households will then pay £40 per year in repayments, starting in April 2023.

In addition to this, on 1 April 2022, all homes in England in council tax bands A-D will receive a non-refundable £150 saving on their council tax bill. It’s estimated that around 80% of council tax payers in England will receive this saving.

Alongside this, a £150m discretionary fund will also be established to help low-income families who live in higher council tax bands, and households in bands A-D who are exempt from council tax. As council tax changes only apply in England, £565m will also be given to the devolved administrations in the rest of the UK, to help them offer similar levels of support.

The above forms of energy bill help will only apply to England, Scotland and Wales, because Northern Ireland has its own system. However, the Chancellor has also announced that he will provide £150m so that Northern Ireland can provide its own support.

Finally, the government is also going ahead with existing plans to expand eligibility for the Warm Homes Discount Scheme by almost a third. It’s now estimated that three million vulnerable households will benefit from the scheme.

In total, this package of announcements will cost the government around £9 billion.

Why have bills risen by more than 50%?

The energy regulator Ofgem has lifted the maximum rate that suppliers can charge for energy in response to a fourfold increase in energy market prices over the past year.

The price cap, which was introduced back in January 2019, is calculated by Ofgem based on the costs faced by suppliers, including buying energy from the wholesale market and levies for maintaining the energy network's infrastructure and renewable energy projects.

In the past 12 months, the cost of wholesale energy has risen sharply. As a result, many energy suppliers have actually supplied energy at a loss. This has led to the demise of even some of the UK’s largest energy suppliers. However, a 54% rise in the price cap is much larger than some analysts predicted.

The new price cap will affect standard default tariff customers who have not switched to a new deal. It will also apply to those who have remained with their new supplier after their previous supplier exited the market.

Speaking about the new price cap, Jonathan Brearley, chief executive of Ofgem, said:

"We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.

"The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.

“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future."

Should I switch supplier?

In short, it’s too early to say. Over the course of the past few months, the advice has been to avoid running an online energy comparison. This is because the best energy deals on the market from the UK’s best energy suppliers have been unable to beat the energy price cap.

Now that price cap has changed, whether switching is advisable or not will depend on the tariffs suppliers make available. This will only be known in the coming days.