Energy bills could be ‘slashed by £400’ under plans to lower price cap this winter

Household energy bills could be slashed by £400 this winter under plans to lower the price cap.

Chancellor Nadhim Zahawi has reportedly asked Treasury officials to put together a multibillion-pound relief package that could see the price cap drop from January.

Mr Zahawi believes that reducing the cap could be the most effective way to help consumers save money, as forecasts currently predict annual energy bills will cost households more than £4,000 from next year.

It would alter how Ofgem determines the level at which the cap should be set by removing an allowance that suppliers can charge consumers. Instead, that cost would be paid for through financing facilitated by the Treasury and Bank of England, according to The Sunday Times.

The scheme would not come into effect before the price cap rise in October, but it could be rolled out by the start of 2023.

The proposals are reportedly being worked on for either Liz Truss or Rishi Sunak to potentially announce when one of them becomes the new Prime Minister on 5 September.

Although there is no guarantee that either candidate will go ahead with the measure as each has announced their own plans to help ease the cost of living crisis for households.

Meanwhile, Keith Anderson, chief executive of ScottishPower, has proposed that bills should be frozen at their present level of £1,971 for two years.

This would see suppliers cover the gap between this and the wholesale price by borrowing from a “deficit fund” supported by commercial banks, with the sums repaid over ten to 15 years.

The repayment costs would then be passed on to consumers in bills over the same period or moved into general taxation.

Mr Anderson previously suggested the idea in April but it was rejected by former Chancellor Mr Sunak who instead opted for a £15 billion intervention focused primarily on direct payments to households.

How much is the price cap set to rise?

The cost of an average household’s annual energy bill could reach nearly £5,300 from April if current sky-high wholesale prices for gas and electricity do not fall soon, latest figures suggest.

In a new forecast, energy consultancy Auxilione predicted that the price cap on energy bills could reach £3,628 in October, up from £1,971 today. It could then rise again to £4,538 in January and peak at £5,277 in April.

The figure given for the price cap is based on what an average household uses. Those who use more than average will have to pay more, and those with less usage will face smaller bills.

It is based on the price that suppliers pay to buy energy which they then sell on to households. Energy regulator Ofgem observes this price over the months leading up to when it has to change the price cap, which happens four times a year – in October, January, April and July.

Most of the observation window for October’s price cap has now passed, so forecasters are confident that their predictions will not be far off when Ofgem announces the cap level on 26 August.

The forecasts for January and beyond are more uncertain as these observation windows have not yet started, but it provides a good indication of where the cap might be set if prices do not change much from where they are today.

Fluctuations in wholesale prices could add or remove hundreds - if not thousands - of pounds from the final figure.