Energy price cap hike coming amid ‘volatile’ wholesale market

Households look set to face another financially challenging winter after it was confirmed the Ofgem energy price cap will surge 10% from October.

It means gas and electricity bills will go up £149 a year (£12.50 per month) to £1,717 - though the exact amount you pay will depend on your usage. 

This rise will cancel out the 7% drop recorded in July, with the new cap also coming in above the level of the April to June price cap. It means energy prices will be roughly 50% higher than they were when the energy crisis began three years ago.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

According to energy regulator, the latest price hikes have come mostly as a result of a "volatile global gas market". Increasing geopolitical tensions and extreme weather events have pushed international wholesale prices up.

The situation has led to warnings from energy consultancy Cornwall Insight that the energy price cap could rise yet further in January. Wholesale prices have the biggest influence on the level of the price cap because the UK is reliant on imports for much of its energy use.

Some fixed energy deals are available which could keep household energy bills below the rate of the cap. But the savings on offer are currently very small, and rates could soon go above the October rate of the cap.

What does the new Ofgem energy price cap mean for my energy bills?

Annual energy bills for a typical household will rise from the equivalent of £1,568 a year to £1,717 a year from 1 October. The true annual figure for your energy bills is likely to be different for two reasons.

First, this next cap will run for three months until 31 December, as Ofgem sets rates on a quarterly basis. Future caps are highly likely to come in at different prices to the October to December rate.

Second, the yearly figure is based on the regulator’s idea of how much energy the average home uses (2,700kWh for electricity and 11,500 kWh for gas). So, someone who lives on their own in a small property would be likely to have lower energy bills, while a large household with high energy use can expect to pay more.

The most relevant figures from Ofgem's announcement are the percentage increase - 10% - and the new set of unit rates. The cap specifically governs the maximum you can be charged per kilowatt hour (kWh) for your gas and electricity, as well as how high suppliers can set standing charges. The rates for the October to December cap will be:

Please be aware that these Ofgem figures are national averages, with your actual unit rates depending on where in the UK you live. You can find out more about prices in your area on the energy regulator's website.

Ofgem’s announcement will affect around 27 million households who are on a standard variable tariff (SVT - the type of energy deal governed by the price cap). If you’re among the five million households that have a fixed deal, your rates will not change until that deal expires.

What has Ofgem said?

Announcing the change on Friday (23 August), the energy regulator urged people who were struggling with their energy bills to contact their suppliers. It added that it could be worth looking into a fixed energy deal.

Ofgem CEO Jonathan Brearley said: “We know that this rise in the price cap is going to be extremely difficult for many households. Anyone who is struggling to pay their bill should make sure they have access to all the benefits they are entitled to, particularly pension credit, and contact their energy company for further help and support.  

“I’d also encourage people to shop around and consider fixing if there is a tariff that’s right for you – there are options available that could save you money, while also offering the security of a rate that won’t change for a fixed period.  We are working with government, suppliers, charities and consumer groups to do everything we can to support customers, including longer term standing charge reform, and steps to tackle debt and affordability."

Brearley added that the options being considered for standing charges included getting suppliers to offer a greater choice of tariff and altering how they are paid. He also said the UK needed to build a "homegrown renewable energy system" to reduce consumer bills in a meaningful way. He criticised the existing system for being "too easily influenced by unforeseen international events and the actions of aggressive states".

Could higher energy prices push inflation up?

October’s price cap announcement could mean inflation rebounds later in 2024. A spike in energy bills was one of the main reasons why the Consumer Prices Index (CPI) soared to a record 11.1% in October 2022. Although this upcoming rise in bills is unlikely to send inflation that high again, it could still delay Bank of England interest rate cuts.

Myron Jobson, senior personal finance analyst at Interactive Investor said the latest Ofgem announcement "casts a shadow" over what had been an "optimistic" outlook for the rate of UK price rises. It could also dampen consumer confidence.

He added: “Energy prices have a direct and immediate impact on monthly expenses, and for many, this increase could offset the benefits of lower inflation elsewhere. This means that despite the broader economic indicators showing improvement, the cost of keeping the lights on and homes warm will continue to strain tight budgets."