Millions of households should brace themselves for an energy bill hike of more than £80 a year from April as Ofgem lifts the cap on standard energy tariffs, according to the regulator’s chief executive.
Jonathan Brearley said Ofgem would announce plans to lift the energy price cap for the first time in two years early next month, and warned that the move would wipe out the £84-a-year cut brought in last year.
In total, the increase could raise the dual-fuel energy bills for 11 million households to £1,126 a year from April, when the government’s job support scheme is due to reach its final weeks.
What is the UK energy price cap and how does it work?
How does the energy price cap work?
The cap, one of the biggest shake-ups of the energy market since privatisation, came into effect on 1 January 2019 for 11m households on default tariffs, known as standard variable tariffs (SVTs). The government told the energy regulator, Ofgem, to set the cap because ministers argued people on SVTs were being ripped off by big energy firms capitalising on consumer loyalty. The limit is not an absolute one but the maximum suppliers can charge per unit of energy and for a standing charge. There is a separate cap for 4m homes on prepayment meters.
So why are prices moving higher?
In short: if energy market prices climb higher, the cap must move higher, too. The cap is designed to reflect the costs energy suppliers face, the largest of which is sourcing gas and electricity from the wholesale markets. In recent months energy markets have reached historic highs because of tight global gas supplies, causing one of the steepest energy price increases on record. Market prices have continued to climb since the new cap was announced, meaning another rise is likely in April once the regulator has revised its cost assessments.
Is there any way to avoid the increase?
In the past, households could save hundreds of pounds a year by spending a few minutes on one of the many comparison sites, or by signing up to an auto-switching service, and moving to a cheaper tariff, either with their existing supplier or a rival one. But the recent market surge means even fixed tariffs, which are not covered by the cap, are more expensive than the energy price cap itself. The best bet to keep bills in check is to use less energy: if you can afford to invest in insulation this can make a major difference to how much energy you need. Lowering the thermostat by a couple of degrees may also be an option for some.
When will bills begin to fall again?
It is too soon to say. Energy market experts believe gas and electricity wholesale prices will remain high through the winter and into 2022 because energy demand is recovering rapidly after the worst of the Covid-19 crisis. Some believe households may face rising energy bills for another 18 months. In addition to market prices, the regulator includes the cost of using energy networks and paying for government policies – which are also expected to keep rising.
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“I understand that any change in energy prices right now is not going to be welcomed by customers,” Brearley said.
The Ofgem boss blamed the looming hike in standard variable energy tariffs on the steady rise in the market price for gas and electricity.
The price cap increase may include up to £21 for energy suppliers to help recover the cost of unpaid bills during the coronavirus pandemic, but a final decision on this amount has yet to be made, he added.
“The price cap is intended to protect customers against unfair charging. It’s never intended to be the best price in the market,” Brearley said. “If you want the best price then you should get in there and switch your supplier. I’ve just done so myself, and I do it every year. That is the best way to get good value.”
Almost 500,000 energy customers switched to a new supplier each month last year, according to figures from the industry group Energy UK. This compares with a total of 6.4 million for the whole of 2019.
The energy price increase has been widely expected within the energy industry after the market price for UK gas climbed to three-year highs in recent weeks, amid surging gas import rates in Asia and a global commodities boom.
The market boom could add £66 a year to the average dual-fuel energy bill, according to the energy consultancy Cornwall Insight.
However, Britain’s biggest energy suppliers are also calling for an extra £21 a year on the cap to help them reclaim the “bad debt” from households which have been unable to afford their energy bills during the pandemic.
Brearley said Ofgem would treat “any submission from any part of the industry with a degree of scepticism”, but that evidence he had seen so far suggested the cost estimates used to account for customer debt needed to change.
“We’re going to take a very cautious view, from a customer’s perspective, but we do need to take bad debt into account because it is one of the costs that these businesses face,” Brearley said.
He added that the regulator’s top priority for the year would be helping energy customers to weather the financial strain of the pandemic, by insisting suppliers treat customers fairly.
The regulator lifted a ban on energy companies using debt collectors to chase unpaid bills in June last year, after only three months’ reprieve, on the condition that suppliers first offered debt repayment plans to struggling customers.
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“What we’ve said to suppliers is that we understand that you need to issue energy bills, we understand that you need to pursue costs but you’ve got to do that in a respectful and fair way,” Brearley said.
He said Ofgem was also “looking very hard” at E.On UK, one of the largest energy suppliers, which charged its customers twice in the run-up to Christmas and was unable to run its customer service channels as usual for almost two weeks owing to a deluge of customer complaints.
“E.On came to us very openly, and self-reported this, and they have put things right,” said Brearley. “But what a time for something like that to happen to customers. We’re not in a position to comment publicly, but as you can imagine we’re looking very hard at what happened, and any detriment to customers as a result.”