The energy price cap is to rise by 54% in April – here’s what it means for you
Ofgem, the UK's energy regulator, has said that the energy price cap is to rise by £693 from 1 April – a 54% increase on its current level. Saloni Sardana explains what the price cap is, and how the increase will affect you.
Ofgem, the energy regulator, has said that the “energy price cap” will rise by £693 – from £1,277 to £1,971 – for those on default variable rate tariffs who pay by direct debit. Pre-payment customers will see an increase of £708 from £1,309 to £2,017. The change will affect around 22 million customers, says Ofgem. Customers who pay by cash or cheque pay an extra £130, which reflects "the higher cost for energy companies to serve them".
The new cap will come into effect from 1 April this year, and follows an increase of £139 last October as Europe endures its worst energy crisis ever, sending around 30 UK energy companies bust in recent months affecting 4.3 million domestic customers.
MoneyWeek has rounded up the most common questions about the energy price cap and how it may affect you.
What is the energy price cap?
The energy price cap is the maximum price per kilowatt hour (kWH) that energy providers can charge consumers for gas and electricity. Given average usage, this will from 1 April amount to £1,971 for the average household. But the term “price cap” is a misnomer, as in reality, prices can be much higher – it depends on how much energy you use.
The price cap only applies to variable tariffs – deals where the per-unit gas and electricity cost varies at the discretion of the provider. Fixed-rate deals, where consumers can lock in a rate over a fixed time, typically one or two years, are unlikely to be covered.
So how do you know if you are protected by the price cap? If you have never switched tariffs, or did not move to another deal once your fixed deal ended, you will be protected by the energy price cap. Also, if you were recently moved to another provider because your existing provider went bust, then the price cap will apply to you.
Why is it going up?
The price cap is reviewed twice a year and is supposed to track wholesale energy costs, stop energy firms making excess profits and ensure "customers pay no more than a fair price for their energy", says Ofgem, but "the current level does not reflect the unprecedented record rise in gas prices which has... taken place".
Natural gas prices have soared around the globe, with wholesale prices quadrupling for a number of reasons, including higher demand as economies re-opened after months of Covid-19 restrictions, and reduced supply from Russia as geopolitical tensions mount.
The UK has been hit particularly badly as it is a net importer of natural gas. At the same time, the UK has experienced a period of very low windspeeds, outages at nuclear plants, and a fire that shut down a vital electricity interconnector last year, all of which have increased demand for gas and caused higher prices and even food shortages.
Should you switch energy provider?
If you are a consumer you may be scratching your head wondering whether there is anything you can do to mitigate the impact. Should you, for example, switch your energy provider?
MoneySavingExpert’s Martin Lewis thinks most consumers should stay put, even after the rise – but "for the first time in many months" a few may be better off switching.
What has the government done so far?
Energy minister Kwasi Karteng recently held crisis talks with energy firms to see how they can protect consumers from further energy price rises and prevent more firms going bust.
The government is considering measures including help for households deemed most vulnerable, and even potentially handing out loans to help them weather the crisis and spread the financial burden over a longer period of time.
The Treasury has said that "millions of households" in England will get up to £350 to help soften the blow. All domestic electricity customers will get £200 off their energy bills, with "80% of households receiving a one-off £150 Council Tax rebate from April". Energy firms will apply the discount to bill from October, while local councils will apply the council tax rebate directly to households in bands A to D in April.
However - the £200 energy bill discount is only a loan. It will be "automatically recovered from people’s bills in equal £40 instalments over the next five years". The council tax rebate does not have to be repaid.
The government will also provide "discretionary funding of £144 million will also be provided to support vulnerable people and individuals on low incomes that do not pay Council Tax, or that pay Council Tax for properties in Bands E-H".
What can struggling consumers do?
If you are struggling to pay your bill, Ofgem advises you to contact your energy supplier as soon as possible – "Depending on their circumstances, customers may be eligible for extra help with their energy bills or services, such as debt repayment plans, payment breaks, emergency credit for prepayment metered customers, priority support and schemes like the Winter Fuel Payment or Warm Home Discount rebate."
The Warm Home Discount is a £140 energy bill discount for households on low incomes. While many suppliers have already closed their schemes for 2021-2022, some providers, including SO Energy, E.ON Next and Bulb are still accepting applications, says Lewis.
Although rare, in some extreme cases a supplier may contact you about the possibility of cutting you off if a bill has not been paid for 28 days. But before they cut you off, the supplier must give consumers a chance to pay whatever is owed via a payment plan. So it is worth talking to suppliers and deciding a repayment plan.
A "Breathing Space Scheme" has been put in place, which gives customers 60 days to get advice on debt. In that time, creditors "must stop any collection or enforcement activity". Once that period ends, however, debts can be collected "in the usual way".
If you are still experiencing problems you should call Citizens Advice on 0808 223 1133
Is this expected to last long?
The government could be wary of implementing relief measures – partly because it remains unclear how long the crisis may last.
If energy prices stay as high as they currently are, then the government may be forced to keep the relief measures in place until the crisis dissipates, something which will cripple the Treasury’s finances.
In fact, Lewis reckons if wholesale prices don’t fall from current levels, then “the cap will likely rise another 20% on top in October”.
UK chancellor Rishi Sunak has said “there’s only so much the government can do”, indicating lukewarm support for introducing further measures.