Those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,971 per year (difference due to rounding). Prepayment customers will see an increase of £708 from £1,309 to £2,017.
What is the price cap and why has it been hit by a record increase?
The increase is driven by a record rise in global gas prices over the last six months, with wholesale prices quadrupling in the last year. It will affect default tariff customers who haven’t switched to a fixed deal and those who remain with their new supplier after their previous supplier exited the market.
The price cap is updated twice a year and tracks wholesale energy and other costs. It stops energy companies from making excessive profits, ensuring customers pay no more than a fair price for their energy. It allows energy companies to pass on all reasonable costs to customers, including increases in the cost of buying gas.
Since the price cap was last updated in August, the current level does not reflect the unprecedented record rise in gas prices which has since taken place. Under the price cap mechanism, energy companies will be allowed to pass on these higher costs from April when the new level takes effect. This is because energy companies cannot afford to supply electricity and gas to their customers for less than they have paid for it.
Over the last year, 29 energy companies have exited the market or been put in special administration in the wake of soaring global gas prices, affecting around 4.3 million domestic customers.
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.”
What is the government's plan?
On Thursday, Chancellor Rishi Sunak announced the Energy Rebate Plan, which will provide households with a £200 loan that will automatically be repaid in £40 instalments over the next five years. For households in Bands A-D, there will also be a £150 council tax rebate, funded by government grants.
The effect on British households
Despite the government's attempts to cushion the blow of the price hikes, the think tank Resolution Foundation estimates around a quarter (five million) of households will be driven into fuel poverty,
an increase of 2.5 million.Frances O’Grady, General Secretary of the Trades Union Congress, said: “The chancellor’s announcement is hopelessly inadequate. For most families it’s just £7 a week and more than half must be paid back. It’s too little, it’s poorly targeted, and it’s stop gap measures instead of fixing the big problems.” How do we keep energy prices low moving forward?Figures from Schneider Electric reveal that, even ahead of a price hike, we’re already paying the price for wasting energy:
• 84% respondents are concerned about rapidly rising energy bills
• More than a third (30%) of energy consumption in buildings is wasted
• 32% of UK businesses have already switched to a clean/renewable energy supplier, and 53% plan to do so in the next two years
• 25% of UK businesses claim to have installed a microgrid or renewable power source; with 47% planning to do so in the next two
years.
David Hall, Power Systems VP UK & Ireland at Schneider Electric, argues that reducing energy waste and implementing effective energy management will buy us crucial time. This is why we need to invest in smart grids which will help to achieve the reductions in carbon emissions we need to make.
“More than ever, we need to ensure consumer energy bills remain low to avoid weakening the appetite for clean power, while investing more in network improvement to power a greener economy.
“As utilities look to invest in upgrading the electrical network to drive net-zero grids by 2035 and simultaneously increase EV charging capacity, they will also be looking to avoid creating upward pressure on the cost of electricity for consumers and businesses who are increasingly conscious of their own carbon footprints.
“Taking action now and harnessing a 'smarter' grid to create network efficiencies and smart load balancing, while also giving the ability to drivers, home and business owners to earn from their energy surplus, could provide an incentive to balance the grid and create a culture of ‘prosumerism’ – a win-win situation,” David Hall concludes.