Ofgem’s price cap is to rise by 13 per cent from 1 July, driven by the ongoing conflict in the Middle East, the regulator has said.
The jump will equate to a rise of £18 a month for the average household using both electricity and gas, with households seeing an increase of 24 per cent on their gas bills and 5 per cent on their electricity bills.
This means households are likely to spend an additional £221 on their energy bills, in what has been described as “deeply unwelcome news” by energy secretary Ed Miliband.
The current price cap for a typical household paying by direct debit for gas and electricity is £1,641.
What is Ofgem’s energy price cap?
The energy price cap is the maximum amount energy suppliers can charge for each unit of energy for households on a standard variable tariff.
It is not the maximum amount you could be charged for energy in a year, nor a fixed rate. Rather, it is an indication of the average amount households can expect to pay if their energy consumption is ‘typical’.
In practice, the price cap is the maximum amount providers can charge per unit, either per kWh or as a daily standing charge. What you will actually pay will depend on where you live, how you pay your bill, and the type of meter you have.
The price cap was introduced by the government in 2019 to ensure energy bills accurately reflect the cost of energy. It is updated every three months.
Currently, 40 per cent of accounts – or 22 million – are fixed tariffs, according to Ofgem figures, and are therefore unaffected by this price rise.
Why is the energy price cap going up?
The increase in today’s energy price cap is due to the ongoing volatility in the global markets, caused by Donald Trump’s war in Iran and their blockage of the Strait of Hormuz.
The energy price cap is calculated based on wholesale energy prices. This is the amount energy providers pay for gas and electricity before supplying it to households, which has been rocketing higher in recent months as the passageway, which a fifth of the world’s oil and gas is carried, remains blocked.
Households have yet to feel the impact, as the price cap is reviewed on a quarterly basis, and April saw a 7 per cent drop thanks to government measures to reduce bills.
This included moving 75 per cent of the cost of the UK’s renewables obligation from household bills on to general taxation, and scrapping the energy company obligation scheme.
This means households will be largely shielded over the warm summer months, but concerns are growing over a painful hit when the cap is reviewed in October and energy demand rises as temperatures drop.
The war in Iran has blocked the Strait of Hormuz where a fifth of the world’s oil and gas is transported (Reuters)
Cornwall Insight’s forecasts suggest the cap in October will be at a similar level to July, even if the Middle East conflict were to end soon, due to the physical damage to infrastructure and lingering effect of disrupted supply.
Are prices going to keep going up?
Unfortunately, early predictions suggest they will. Analysts Cornwall Insight’s first forecast for for October to December puts the cap at £1,899 per year – a 2 per cent rise on July’s cap, that would come in just as temperatures fall and energy usage rises.
The October figure will not be confirmed until August, and Cornwall Insight said there remained a considerable amount of time for wholesale market conditions to shift.
However, it warned “the direction of travel is being shaped by several unknowns that are unlikely to be resolved quickly”.
Do I need to do anything?
Currently, 40 per cent of household energy accounts – or 22 million – are fixed tariffs and are therefore unaffected by this price rise.
Those who have not yet signed to a fixed deal should consider one as soon as possible.
What else can I do to cut my bills?
There are other ways to potentially save on your energy bills, including checking if your energy supplier offers free electricity, such as British Gas’s PeakSave or E.on’s Pledge tariff. This could help to reduce your bill without cutting back on usage.
Households should also check and adjust their boiler flow settings: If you have a combi boiler, reducing the flow temperature to 60C or below could lower your bills.
Using an air fryer instead of an oven will cut energy usage, as will turning down the thermostat, running the washing machine in off-peak hours and taking appliances off standby.
It is also important to avoid estimated bills. If you don’t have a smart meter, send regular meter readings to your supplier to ensure direct debits are set at the right amount.
What has the government said?
Calls have been mounting for the government to set out action to support the most vulnerable, but chancellor Rachel Reeves stopped short of any immediate energy measures in her cost-of-living plan.
She told MPs last week: “We stand ready to act if market conditions worsen significantly later this year and I have been leading cross-Government contingency work on design of potential future targeted and temporary support for businesses.”
Energy Secretary Ed Miliband said: “The rise in the price cap because of a war we did not choose is deeply unwelcome news for households across the country. We know people were under pressure before this crisis, and that’s why easing that burden is our number one priority.
“We will continue to monitor the situation ahead of the winter and plan for all contingencies. In the immediate term it is essential to de-escalate this conflict to bring oil and gas prices down and as Britain faces the second fossil fuel crisis of this decade, we must learn the right lessons.
“The way to get bills down for good and avoid these price spikes is to go further and faster with this government’s drive for clean homegrown power we control. We are upgrading as many homes as possible ahead of winter with the biggest investment in warm homes in British history.”
