Ofgem price cap: UK energy bills set to rise by £500 a year despite price cap reduction

Energy bills are set to rise by an average of £500 a year despite a reduction in Ofgem’s price cap, analysts warn.

Ofgem has today (27 February) announced it is lowering its energy price cap from the current £4,279 per year to £3,280 for the average household, effective from 1 April.

The energy regulator said the reduction of almost £1,000 reflects recent falls in wholesale energy prices. The £3,280 figure indicates how much consumers on their energy suppliers’ basic tariff would pay if the government’s Energy Price Guarantee (EPG) was not in place.

From 1 April, the government has set the EPG at £3,000 for the typical bill – meaning consumers will not pay the full level of the energy price cap.

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.”

The £3,280 figure indicates how much consumers on their energy suppliers’ basic tariff would pay if the Government’s Energy Price Guarantee (EPG) was not in place. But customers will pay about 20% more on their bills – approximately £500 – as the government’s additional support in the form of the Energy Price Guarantee (EPG) only partially protects consumers from paying the full price cap.

When the upcoming end of the £400 energy rebate scheme – paid in six instalments of £66 and £67 a month – is factored in, the energy cost for households will increase even more.

The government has been offering relief for millions of billpayers through the EPG, helping to reduce soaring energy bills by more than £1,000 per year, although households are still paying twice as much for energy than they were 18 months ago.

Supply issues, coupled with the conflict in Ukraine have caused huge increases in energy bills over the last year. Although, with groups like British Gas reporting record profits of more than £3 billion, the news that consumers will once again have to brace for higher bills will be a bitter pill to swallow.

What is the Ofgem price cap?

The energy price cap sets a maximum price that energy suppliers can charge consumers for each kilowatt hour (kWh) of energy they use. This doesn’t mean that there is a cap on how much individuals can spend on energy as the total price still depends on consumption.

The current cap for a customer with typical usage paying by direct debit on a default tariff is £0.34 per/kWh with a daily standing charge: £0.46 for electricity, and £0.10 per kWh with a daily standing charge of £0.28 for gas.

This cap means that average households paying by direct debit will pay a rate of £4,279 a year from 1 January to 31 March. However, the government’s EPG subsidises household energy bills so that average households pay £2,500 a year.

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 1 October 2022 and will last until April 2024. It means that consumers will pay less for their energy than they would under the price cap.

Why will energy bills go up?

Despite the new lower price cap, customers are expected to pay about 20% more (£500) on their bills as the government’s EPG only partially protects consumers from paying the full price cap.

The government paid the difference between the price cap and the EPG to provide energy bills relief for consumers. However, this support will become less generous from 1 April, meaning that despite a lower energy price cap, average households will spend more.

The EPG level will rise from £2,500 to £3,000, meaning that the government will be subsidising average household energy bills by around £295 per household.

When the upcoming end of the £400 energy rebate scheme – paid in six instalments of £66 and £67 a month – is factored in, the energy cost for households will increase even more.

However, Cornwall Insight said it expects the price cap to fall further, to £2,153 in July and then hit £2,161 from October. This means that later in the year households could see their energy bills drop by over £800 annually.

Because these predicted caps are below the level of the EPG, it also means that the government won’t have to pay to subsidise energy bills.

Even the lower predicted figures for mid-2023 are still nearly double the price cap level before the energy crisis. In August 2021 the price cap was £1,277, which was then the highest it had been for years.