Household energy bills will rise by an average of £500 despite a reduction in Ofgem’s household energy cap.
The regulator announced on Monday it will cap the amount households pay on electricity and gas bills each year at £3,280 from April 1 – a drop from the previous cap of £4,279 effective from the beginning of January to the end of March.
Ofgem said the reduction of almost £1,000 reflects recent falls in wholesale energy prices.
The energy price cap sets a maximum price that energy suppliers can charge consumers for each kilowatt hour (kWh) of energy they use. How much individual households pay depends on how much energy they use.
Households had been protected from the previous high cap due to the UK Government’s Energy Price Guarantee (EPG), which capped the energy unit price and resulted in an average household bill of £2,500.
But customers will pay about 20% more on their bills – approximately £500 – as the Government’s EPG becomes less generous from the beginning of April, leading to an average bill of £3,000.
When the upcoming end of the £400 energy rebate scheme is factored in, the energy cost for households will increase even more.
Under the scheme, six instalments of £66 or £67 were paid monthly to bill payers from October, but that support ends on March 31.
What is the energy price cap?
The energy price cap sets a maximum price that suppliers can charge consumers for each kilowatt hour (kWh) they use. How much you pay depends on how much energy you use.
The cap is a government protection, calculated by Ofgem. The regulator says having it in place ensures the profit that energy suppliers make is capped.
It limits the amount that domestic customers pay to 34p per kilowatt hour (kWh) for electricity and 10.3p per kWh for gas.
For an average household, that works out at around £2,500 per year.
This limit is set to become less generous from the beginning of April, rising to an average bill of £3,000.
But energy suppliers are allowed to charge more, with the UK Government picking up the difference in each household’s bill.
The cap is currently set at £4,279 per year for the average household, meaning that the UK Government has probably been paying about £1,779 per year to energy suppliers on average for every household they serve between September and March.
But the fall of the Ofgem price cap, and the rise of the energy price guarantee level to £3,000 means the UK Government will be paying just £295 per household per year from April to June.
Cornwall Insight said that it expects the price cap to fall further, to £2,153 in July and then hit £2,161 from October.
This will be well below the price guarantee, so will feed through to lower bills for customers and reduce the UK Government’s part of the bill to zero.
But even these bills are around double where the price cap had been before the energy crisis.
And what is the energy price guarantee?
The energy price guarantee is a temporary additional measure to protect consumers from the recent significant increases in wholesale gas prices.
The guarantee was put in place on October 1, 2022 and will last until April 2024. It means that consumers will pay less for their energy than they would under the price cap.
Dr Craig Lowrey, principal consultant at Cornwall Insight, said: “Regrettably the forecast for April looks set to leave the price cap above the increased Energy Price Guarantee level, meaning average annual consumer bills will effectively jump by 20% (£500).
“However, this is before we take into account the end of the £400 energy rebate scheme in March, meaning that the cost of energy for households will increase by even more.
“While tumbling cap projections are a positive, unfortunately, already stretched households will be seeing little benefit before July.
“In the latter half of the year, we see a notable shift in our predictions, as the cap falls below the government support price for the first time since the introduction of the EPG in October.
“This gives us optimism as far as the wider energy debate is concerned.
“While prices under the cap remain considerably higher than historic norms, the combination of falling wholesale prices and an increase in the EPG could see the return of competitive tariffs, and with it the chance for consumers to take back some control over their energy bills.”
What is Ofgem saying?
Ofgem chief executive Jonathan Brearley said: “Although wholesale prices have fallen, the price cap has not yet fallen below the planned level of the Energy Price Guarantee. This means that on current policy bills will rise again in April. I know that for many households this news will be deeply concerning.
“However, today’s announcement reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won’t make an immediate difference to consumers, it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease.
“If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower.
“However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of government support that is currently in place, this is a very tough time for many households across Britain.
“Where people are struggling, we urge them to contact their supplier to make sure they are getting all the help and support they are entitled to. We also think that, with bills continuing to be so high, there is a case for examining with urgency the feasibility of a social tariff for customers in the most vulnerable situations.”
‘Energy to account ‘for up to 10% of the average salary’
Energy bills will account for up to 10% of the average salary from April, new research suggests.
The TUC said its analysis found that the average energy bill will rise to £250 a month, more than double the amount workers were paying a year ago.
The union organisation called on the government to set up a public energy company to lower bills, saying that workers on low pay were being hit the hardest.
A full-time minimum wage worker will face bills worth 16% of their monthly salary when the price cap is raised in April – up from 8% in March 2022, said the TUC.
It repeated its calls for a higher windfall tax on big oil and gas companies and urged ministers to end “Britain’s living standards nightmare”.
The TUC claimed the UK energy market has become a “racket” with oil and gas firms making billions in profits while families struggle to heat their homes.
TUC general secretary Paul Nowak said: “The government must cancel its imminent hike in household energy bills at next month’s budget. Families across Britain are being pushed to the brink by sky-high bills.
“That means imposing a larger windfall tax on greedy oil and gas suppliers, and it means boosting wages across the economy.
“UK workers are on course for two decades of lost pay. This has left millions brutally exposed to soaring prices.
“Unless we get wages rising, working people will just keep lurching from crisis to crisis.”
Energy giants have so far notched up mammoth earnings of more than $200bn US dollars (£166bn) between them for 2022 after a year of sky-high oil and gas prices.
British Gas owner Centrica has joined UK-listed oil firms BP and Shell in revealing record hauls, with their counterparts worldwide also benefiting from rocketing commodity prices in the wake of Russia’s war in Ukraine.
Centrica revealed a more than tripling of adjusted operating profit on Thursday, hitting £3.3bn last year compared with £948m in 2021.
The profits sparked anger from campaigners and politicians who say that companies are benefiting from the same high energy prices that are forcing people to choose between heating their homes or feeding their families.
The profit overwhelmingly came from Centrica’s nuclear power plants and its energy trading arms.
Profits at British Gas Energy, which serves 7.5 million households, dropped by 39% to £72m.
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