Everything You Need to Know About the Energy Price Rise

Ofgem has raised price caps on energy, which will lead to over half of British households seeing an increase in energy bills. Ofgem sets maximum prices that can be charged for gas and electricity to those who have not switched suppliers and are on default tariffs. The new cap could see these households pay, on average, an extra £117 a year.


It will affect 11m customers on default tariffs, raising their rate to a new ceiling of £1,254 a year for a home with typical use, leaving many consumers paying more for their electricity and gas than before the flagship policy took effect on 1 January.* Ofgem also announced a rise of £106 a year to £1,242 for a further 4m households on prepayment meters.


Dermot Nolan, chief executive of Ofgem has tried to reassure people. ‘We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering,’ he explains.


So, how does the cap work? Energy price capping is a government policy specifically designed to reward those who have stayed loyal to their energy suppliers as well as the more vulnerable bill-payers. Ofgem sets the cap for households in England, Wales and Scotland. Northern Ireland has a separate energy regulator and its own price cap.


This cap means that the unit price of energy for electricity and gas cannot exceed a certain amount. There is also a maximum standing charge and energy companies are not allowed to charge default tariffs that are higher than these thresholds. This means roughly £74 of the £117 increase is due to higher wholesale energy costs.


The cap has increased due to rising wholesale costs resulting from the higher global price of oil, with wholesale costs accounting for more than a third of a typical energy bill.  Environmental and transportation costs going up have also contributed to the rise. The cap applies to each unit of energy rather than the total bill, meaning that those who use more energy will still pay more than those who use less.


Although inconvenient, the cap could change as the level of the cap is updated every six months, at the start of April and the start of October, this year and next year, and possibly after that as well. Energy Minister Claire Perry said: ‘We were clear when we introduced the cap that prices can go up but also down.’ She also added that energy suppliers were ‘no longer able to rip off customers on poor value tariffs’.


This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.


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