Energy bills: why are gas and electricity unit prices changing? January 2023 changes to cap per kWh explained

The energy price guarantee was introduced in a bid to ease the UK’s cost of living woes by capping energy bills - so, why are rates changing in the New Year?

2022 will go down in history as the year in which the UK endured its most severe cost of living crisis in modern times.

While food prices and the cost of a tank of fuel have all rocketed over the last 12 months - largely as a result of the Russia-Ukraine war - energy bills have been the single biggest driver of the record inflation that has significantly eroded people’s spending power.

Electricity and gas prices began to soar at the end of 2021 as economies consumed vast amounts of energy in a bid to recover from the economic impacts of Covid-19 - something that caused several major energy suppliers, including Bulb, to go bust. Vladimir Putin’s invasion only intensified the situation, forcing energy suppliers to pass massive price hikes onto their customers.

The three governments the UK has had over the last 12 months have all announced interventions in a bid to shield people from the worst of these hikes. Arguably the most significant action was taken by Liz Truss, who introduced the energy price guarantee to try to keep domestic bills down.

It is meant to cap your gas and electricity bills for the next 15 months. But despite this intervention, you may have had a letter from your supplier in December telling you that they are set to increase your energy bills.

So, why is this the case - and how much extra could you be paying from the New Year? Here’s what you need to know.

Energy prices have rocketed in 2022 (image: PA)

What is the Energy Price Guarantee?

The energy price guarantee is a policy that was implemented by Liz Truss during her short time as Prime Minister.

Introduced in a bid to ensure domestic energy bills did not rise so much they would become unaffordable, it capped the amount of money energy suppliers could charge for a unit of gas or electricity. The government said it would mean the average household would have an annual energy bill of £2,500 - although the key thing to note is that you may pay more or less than this figure depending on your energy usage.

The energy price guarantee has superseded the Ofgem energy price cap, which was due to rise to more than £3,500 in October 2022. The Ofgem limit is due to rise again to almost £4,300 from January 2023, but consumers will not be exposed to this increase.

Instead, this figure can be viewed as an illustration of how much public money the government is having to spend to cap energy bills through the energy price guarantee.

To keep energy unit prices capped, the government is basically paying energy suppliers the difference between the cap and wholesale gas and electricity prices. It will continue this intervention until April 2024.

Liz Truss announced the energy price guarantee during her short tenure as Prime Minister (image: Getty Images)

Another thing to be aware of is that the unit price figures the government has communicated are actually averages rather than concrete limits.

So, while it has said units of electricity will be capped at 34p per kilowatt hour (kWh) for electricity and 10.3p per kWh for gas until March 2023 (VAT inclusive), these are actually the average prices consumers will pay for each unit they use. The actual price caps will be different depending on where you live (England, Scotland and Wales are divided into 14 ‘energy regions’), and what type of meter you have.

For example, a person living in the Midlands who has a pay after usage meter and is on a standard variable tariff with their supplier will pay 34.7p per kWh for electricity and 10.6p per kWh of gas (before VAT is added). Someone in the same region who has a prepayment meter will pay 31.2p per kWh for electricity and 10.1p per kWh for gas.

Why could your energy bill increase from January?

To add to the confusion, the government has marginally adjusted the energy price guarantee’s unit price rates for the three months from 1 January 2023 to 31 March 2023. It means we are all likely to be paying an extra few pounds towards energy over the coming months.

These changes generally amount to fractions of a penny. For example, someone in Yorkshire who has a standard pay after usage meter will see their unit prices rise from 34p per kWh (electricity) and 10.5p per kWh (gas) to 34.8p per kWh (electricity) and 10.6p per kWh (gas) from 1 January.

The highest prices will be seen in North Wales and Merseyside, where unit prices will climb 1.25p per kWh of electricity to 38.3p and 0.1p per kWh of gas to 10.6p - changes that will add around £5 to an annual bill.

Energy bills could go up as unit prices are changing in January 2023 (image: AFP/Getty Images)

However, not all of the changes will be price increases. Eight areas of Britain will see unit prices marginally reduced for those who have prepayment meters.

Also, while most energy suppliers will be implementing the changes in full, some are opting to not do so. The BBC has reported Octopus Energy will only be passing on price cuts, and EOn will be freezing rates for prepayment customers.

The government told the broadcaster that any changes will “mostly be small” and that the average annual bill for a household would still work out as roughly £2,500.

To see what your energy unit price will be from January, visit the government’s website. It may also be worth contacting your supplier to see how the changes will impact your bill.

Will energy bills rise again in 2023?

These unit price changes are not the only alterations that will be made to our energy bills in 2023.

The government’s energy bills discount scheme will expire at the end of March 2023. It means the discounts of £66 to £67 that have been applied to energy bills since October 2022 will no longer be paid out.

Meanwhile, the energy price guarantee will see unit price caps increase from 1 April 2023, with the average household’s annual gas and electricity bill likely to rise £500 to £3,000. This cap has been legislated to last until April 2024.