How to cut your energy bill this winter

Gas and electricity prices have risen by more than 250% so far this year. And they’re likely to go higher still Saloni Sardana looks at what can you do to make sure the price rises don’t bite too deeply.

The UK looks to be heading for a very expensive winter with wholesale electricity prices going through the roof. Gas prices have risen more than 250% this year, forcing a spate of small energy providers to go bust.

Experts are warning that many providers will cease to exist come December, dramatically reducing the availability of cheap deals.

So what can you do to make sure the price rises don’t bite too deeply this winter?

Why are electricity prices so high?

UK electricity prices are high mainly because of a shortage of natural gas. To cut a long story short, several factors have caused gas prices to spike, including soaring demand as economies eased Covid-19 restrictions, unusually low wind output in the UK, reduced supply from Russia, and higher LNG demand in Asia. On top of that, a fire at a National Grid site has recently shut down a key power cable linking the UK to the continent.

Are things expected to get better any time soon?

So many different variables are at play that it is difficult to predict. But while gas prices remain high, both wholesale and retail electricity prices will stay at current levels, if not higher. Energy regulator Ofgem’s chief executive, Jonathan Brearley, warned that the number of affected customers could rise well above the “hundreds of thousands” who have already been hit.

Kwasi Kwarteng, the business secretary, has sought to reassure the public, stressing that there is no chance of “lights going out this winter”. But of course, that’s a worst-case scenario. What is clear is that your household energy bills are going to rise, and many more small suppliers are likely to go to the wall.

Which firms have already collapsed, or are expected to?

The energy crisis in the UK has already seen seven energy companies collapse in recent weeks, and others are expected to follow. Green Supplier Limited and Avro Energy collapsed this week. The companies’ 830,0000 customers are being switched to a potentially more costly provider.

Utility Point, People’s Energy, MoneyPlus Energy and PfP Energy all ceased trading last week. Meanwhile Bulb, the UK’s sixth-largest electricity provider, is working with Lazard, a financial advisory firm, to boost its finances.

What happens if your energy provider goes bust?

You can read more about what happens if your energy provider goes bust here. But in a nutshell, the answer is “don’t panic”. Your energy supply won’t be interrupted and you won’t lose any money. Ofgem will switch you to a “supplier of last resort”, and you won’t lose any existing credit as it will also be transferred to the new supplier.

In the event this is not possible (which hasn’t previously happened but shouldn’t be ruled out due to current circumstances), a special administrator will be appointed by the regulator and the government to ensure continuity of supply.

So having your energy supplier go bust isn’t really a problem in itself. A bigger issue for consumers will be making sure that they minimise the rise in their energy bills this winter, particularly as the energy price cap is set to rise from October.

What is the energy price cap?

The energy price cap was introduced in 2019. The cap is the maximum price (set by Ofgem) that providers can charge customers who are on their standard default tariffs. It’s currently set at £1,138, but is due to rise to £1,277 from 1 October. The price cap is reviewed twice a year and it’s quite possible it could rise again in April. It is also important to remember that the annual price quoted is based on typical usage by a typical household. So it’s not a cap on your annual bill – it’s a cap on the amount a company can charge per kWh of electricity or gas used. In other words, if you use twice as much energy as the average home, then of course you’ll pay twice as much.

So how can I make sure I have the best deal?

There are two main types of tariff – fixed or variable. The main perk of a fixed tariff is that you can lock in a rate for a fixed period of time, usually one or two years. So if you know prices are going to go up, or that the energy price cap is being raised (see below for more on that), you can fix it now to avoid those price rises.

However, fixed-rate deals are one reason so many small providers are going bust right now. Energy providers have to buy their energy in the wholesale markets. The price of the energy they have to buy has shot up, and they have been unable to pass on these costs because their customers are on fixed rates. Of course, providers should have been managing this risk – either by having sufficient cash cushions to cope, or by “hedging” their exposure to rising prices. But it’s clear that few of them expected things to get this bad.

This has resulted in two main things: firstly, the number of providers is going to shrink dramatically in the coming months. Secondly, fixed-rate deals have been vanishing from the market because companies know as well as consumers that prices are heading higher.

Should I stick with my existing deal or move?

Currently, Moneysavingexpert founder Martin Lewis reckons that if you’re still on a cheap fix today, you should stick with it, as the savings you make will outweigh the “sticker shock” you’ll almost certainly get when the deal comes to an end and you’re faced with both fixed and variable rate tariffs that are a lot higher.

But what if you’re on a standard tariff now? Lewis reckons sticking with it might now actually be the cheapest way for consumers to weather the crisis, even though “this is something he never thought he'd say.”

The price cap doesn’t apply to fixed-rate deals (which normally charge more because of the certainty on offer – just as a fixed-rate mortgage usually has a higher interest rate than the cheapest variable rates). So those on offer now are higher than both the current price cap and the cap that comes into force in October. So if you stick with your current deal, then at least it’s capped at a maximum level until April.

Of course, if you need the security and peace of mind offered by a fix, you may need to just bite the bullet and lock in now, given the risk of prices rising further.

If you are switching, then as consumer website Which? points out, you should give your energy provider your previous year’s energy usage where possible in order to get the most accurate quote. “Many websites will let you estimate based on your house size. But this won’t be as accurate and might imply you can save more (or less) than the reality. Find your usage on your latest energy statement or online account”. Paying by direct debit also helps reduce bills.

Recommended

When investors get over-excited, it’s time to worry – but we’re not there yet
Sponsored

When investors get over-excited, it’s time to worry – but we’re not there yet

When investors are pouring money into markets, it can be a warning sign of impending disaster, writes Max King. So how are fund flows looking right no…
26 Oct 2021
An investment trust that gives exposure to frontier markets
Investment trusts

An investment trust that gives exposure to frontier markets

An investment trust investing in small, illiquid emerging markets has disappointed, but deserves another chance, says Max King
26 Oct 2021
What does Rishi Sunak have in store for investors this Wednesday?
Budget

What does Rishi Sunak have in store for investors this Wednesday?

Rishi Sunak is unveiling his spending plans for the economy this week. John Stepek analyses areas which may be most hit by the budget.
25 Oct 2021
How rising interest rates could hurt big tech stocks
Tech stocks

How rising interest rates could hurt big tech stocks

Low interest rates have helped the biggest companies to entrench their positions. But what if rates rise?
25 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021