What is The Energy Price Cap?
The energy price cap was designed to safeguard customers by restricting the rates that the energy market can charge them for each unit of gas and electricity they consume, as well as the maximum standing charge for access to the grids, using a formula based on their usage.
It is set by OFGEM and is based on a number of factors, primarily the wholesale energy prices charged by suppliers to energy providers over a period of time and until recently was amended every six months to take effect in March and October each year.
However, this has now been amended to quarterly from October 2022 in the anticipation that any reductions can be more quickly passed onto consumers.
The default tariff price cap is based on the energy consumption of a typical household, so homes with higher usage will pay higher energy bills than the capped amount as your actual bill is determine by how much energy you actually use. It is important to note that businesses are not protected by a price cap.
What is happening to the Energy Price Cap in October 2022?
The energy price cap will increase by 80 per cent to £3,549 (up from the current cap of £1,971) per year in October and the price cap will be further reviewed in three months with changes to take effect from January 2023.
The average yearly energy bill for customers on standard variable or default contracts who pay by direct debit will therefore rise by £1,578. The energy regulator Ofgem made the price cap announcement on Friday 26th August 2022.
Homes using prepayment meters will experience a slightly higher rise to the price cap to £3,608 although some public figures are campaigning for this to be brought in line with the general price cap.
Approximately 24 million households will be affected by these changes and will see their energy bills increase in the months ahead as a result of the increases to the price cap.
What is happening to the Energy Price Cap in 2023?
The situation is likely to become even more painful during the first half of 2023 with the price cap almost certainly likely to exceed £5,000 as a result of wholesale energy costs with a reasonable chance that the default tariff will rise above £6,000 in April 2023 before hopefully subsiding, albeit slightly, in July and October 2023.
Beyond this, it is currently too difficult for forecasters to predict although the consensus is that prices will not dramatically fall.
As a result, more people will fall into fuel poverty next year (this is when a household is paying at least 10% of household income towards utility bills). Given that people are already struggling, the next few months will see a significant increase in people defaulting on their utility payments unless their is further government intervention.
Why Are Energy Prices Rising so Much?
As countries began to recover from the covid pandemic, demand for gas grew rapidly and could not be met owing to a lack of supply, resulting in price increases in 2021. The situation was made worse by renewable energy sources like as wind and solar generating less electricity than anticipated due to below average wind. The colder winter weather also putting further strains on the grid.
This increase in gas prices forced some energy suppliers in Great Britain out of business. By the end of December last year, a total of 28 energy companies had gone bust, including bigger companies like Bulb, affecting over two million customers. If your energy supplier collapses, you don’t need to do anything.
You will still receive your gas and electricity as usual. Ofgem, the energy regulator, will move your account to a new supplier. They will let you know which one this is. However, the costs of supplier collapsing are ultimately passed onto consumers, usually in the form of increases in the standing charge which is paid even
More recently, Russia’s invasion of Ukraine has threatened supplies and driven up prices further. Russia is one of the world’s largest producers of oil and gas, supplying the EU with 40% of its gas in 2021.
Most countries in the West committed to reducing or eliminating the sourcing of gas from Russia, which means that a larger population are now buying from a smaller range of suppliers which is driving the price higher. In addition, Russia has reduced the flow of gas into the EU via the Nord Stream 1 pipeline down to approximately 20% of the normal flow rate.
What is the Government Doing About it?
The government has so far introduced a “cost of living support package” which will see every household entitled to £400 towards their energy costs. This will be paid over a 6-month period from September 2022 and will be paid directly to your electricity supplier and will contribute towards your ongoing energy usage.
People in receipt of Universal Credits and some other benefits are also entitled to support totalling £650 towards energy bills which some people will already have received the first payment (Universal Credit recipients will receive the first payment in September 2022) of £326 paid as cash into your bank with your regular benefit payment. The second payment of £324 is scheduled to be paid later this year.
People in receipt of a disability payment will also receive a further payment of £150 in either September or October 2022.
Pensioners are also entitled to an additional “winter fuel payment” of £300 which will be paid around November 2022.
Further details of these payments can be viewed on the official government page here.
These cost of living payments were introduced earlier in the year when it was anticipated that the price cap would rise to around £2,800 in October.
It is clear that this was significantly underestimated and it is almost certain that the government will have to introduce further support imminently to prevent a winter catastrophe.
However, nothing is likely to be announced until the conclusion of the Conservative Party leadership election on 5th September 2022.
What Are the Energy Suppliers Saying?
Several energy suppliers including Octopus Energy are broadly in agreement with a proposal suggested by the Labour Party recently which would see the current energy price cap frozen at £1,971 with the difference met by the government.
This would at least provide consumers with stability with their energy bills in the short to medium term and help prevent further numbers of people falling into fuel poverty.
Under this suggestion, energy suppliers would repay funds back to the government when prices fall over the coming 2-4 years. This would mean that the price cap would likely remain as it is for the foreseeable future.
However, the medium term stability may be more desirable for consumers as opposed to the predicted short term astronomic rises that are likely at this time.
What if I am Already Struggling or Likely to Struggle?
If you are already struggling with your energy bills of debts in general despite the current levels of government assistance available or feel that you are likely to struggle in the near future, you could initially seek the advice of your local council as many have an energy bills support scheme or guidance on the cost of living.
However, if this is not an option, you may wish to look at various debt advice solutions such as a Debt Management Plan through a debt charity such as Step Change or, if eligible, you could seek to enter into a Debt Relief Order if you debts under £30,000, assets (including a vehicle) of less than £2,000 and a disposable income of less than £75 per month after allowing for monthly household costs.
Alternatively, you can contact us here at Become Debt Free if the above is not suitable to your circumstances. One of our friendly advisors can discuss you circumstances to determine what options are available to you.