Energy price cap: what is new Ofgem price cap for October 2022 - what does it mean and how does it work?

Welcome to NationalWorld’s live blog on Ofgem setting the new energy price cap for October.

This is the limit to which energy suppliers can increase bills, and experts predict it could force gas and electricity bills up by around 80% to the equivalent of more than £3,500 per year.

This is happening because wholesale gas prices have been driven up by the war in Ukraine.

Are you worried about paying your bills? Email [email protected] with your thoughts.

Ofgem has confirmed an 80% rise in the energy price cap, sending the average household’s yearly bill from £1,971 to £3,549 from October.

The cap will come into effect for around 24 million households in England, Scotland and Wales on default energy tariffs on October 1, and will remain in place until December 31, when it will be adjusted again.

Ofgem’s chief executive Jonathan Brearley warned of the hardship energy prices will cause this winter and urged the incoming Prime Minister and new Cabinet “to provide an additional and urgent response to continued surging energy prices”.

The regulator said the increase reflected the continued rise in global wholesale gas prices, which began to surge as the world unlocked from the Covid pandemic, and had been driven still higher to record levels by Russia slowly switching off gas supplies to Europe.

The chief executive of Ofgem has urged the incoming prime minister to do more to deal with the impact of energy price rises as the cap on energy bills soared 80% to £3,549 per year.

Jonathan Brearley said the Government would need to add to the support it announced in May when bills were only expected to jump to £2,800.

“The Government support package is delivering help right now, but it’s clear the new prime minister will need to act further to tackle the impact of the price rises that are coming in October and next year,” Mr Brearley said.

“We are working with ministers, consumer groups and industry on a set of options for the incoming prime minister that will require urgent action.

“The response will need to match the scale of the crisis we have before us. With the right support in place and with regulator, government, industry and consumers working together, we can find a way through this.”

My colleague Henry Sandercock has put together a useful explainer on what the energy price cap is.

Ofgem - or the Office of Gas and Electricity Markets - is the UK’s energy regulator.

Independent of government, it says it works to keep energy prices as low as possible, protect consumers and drive the UK towards its net-zero target.

Part of its role is to set a cap on what suppliers can charge people who are on default - i.e. standard variable - tariffs for a unit of energy, so as to stop them from being ripped off.

So, what you’re billed will almost certainly be above the price cap because it doesn’t determine the maximum you will have to pay for your energy usage.

A typical household’s bill will sit around 55% above the price cap.

Ofgem determines its energy price cap by calculating how much it would cost a typical energy supplier to supply an average home, my colleague Henry Sandercock reports.

It does this by analysing several factors that impact our energy bills, as well as usage and market data over a review period.

These include:

The factor that’s driven the major increase to the price cap has been wholesale costs, Henry reports in his full explainer on how the price cap is calculated.

Martin Lewis, who runs the Money Saving Expert website, has urged the Government to provide more help to people, after Ofgem announced the new price cap.

He told the Today programme: “This is a catastrophe, plain and simple. Unaffordable.

“If we do not get further government intervention, on top of what was announced in May, then lives will be lost this winter.

“Too many people to think about, because of these unaffordable, terrible, rises in energy bills.

“We are in an absolutely horrendous situation, and it is going to get even worse in January when the cap for somebody on typical use will move up to over £4,000.”

Responding to Ofgem’s announcement on the increase in the energy price cap, Luke Murphy, associate director for energy and climate at the IPPR think tank, said: “This hike in energy prices will be devastating for many families.

“Many people simply won’t be able to pay, and others would be forced to choose whether their families go cold or hungry.

“Allowing this announcement to go ahead without setting out what support government will put in place means that millions pf people will fear the consequences of this hike for them and their families.

“The government must act urgently to provide emergency support this winter, by freezing energy prices or providing significant support to households through direct payments, with additional targeted support for those on the lowest incomes.

“Meanwhile, we need urgent reform of the energy market and a drive to reduce our addiction to expensive climate-destroying gas to heat our homes. That means a big expansion in clean energy and a national home upgrade and insulation programme to make all our homes warmer and our energy bills cheaper.”

The average monthly energy bill for 2023 will be £500 per month, the energy analyst Cornwall has predicted.

The BBC’s economics editor Faisal Islam has reported that Cornwall has forecasted annual bills for the average household will hit £5,386 in January and £6,616 in April, due to price cap rises.

And this would mean the average monthly energy bill would be £500, more than the average rate of income tax.

Though Faisal says: “It’s right though, to be cautious about 2023 predictions.

“They are based on what I’ve reported on - a frantic dash for gas to be put into storage stockpiles, especially on the continent pushing therm prices higher than £7.

“Some analysts are sceptical about prices sustaining these ultra highs.”

Energy provider EDF has predicted that half of households in the UK will fall into fuel poverty as the cost of living soars this winter, my colleague Sarah McCann reports.

This means that they may have to go without other essential items such as food, in order to keep the heating on.

According to the government’s latest estimate around 13% of households in England, 25% in Scotland, 12% in Wales, and 18% in Northern Ireland are experiencing fuel poverty.

The charity National Energy Action has predicted that the soaring fuel costs will lead to a 50% increase of fuel poverty in households.

And this did not take into account today’s energy price cap rise for October 2022.

Read Sarah’s full story on EDF predicting half of UK households will face fuel poverty this winter.

Chancellor Nadhim Zahawi said the increase in the energy price cap would cause “stress and anxiety” for people but that the Government was working to develop more options to support households.

“I know the energy price cap announcement this morning will cause stress and anxiety for many people, but help is coming with £400 off energy bills for all, the second instalment of a £650 payment for vulnerable households, and £300 for all pensioners,” he said.

“While Putin is driving up energy prices in revenge for our support of Ukraine’s brave struggle for freedom, I am working flat out to develop options for further support.

“This will mean the incoming prime minister can hit the ground running and deliver support to those who need it most, as soon as possible.”

Find out the policies of the Tory leadership candidates and the Labour party around energy bills and the cost of living crisis.