Following the Covid pandemic, the cost of wholesale gas skyrocketed, with suppliers passing the cost on to customers. Businesses closing down resulted in low global energy consumption, which was quickly followed by a rapid rebound as the economy began to open up again. On top of that, following Russia’s invasion of Ukraine, prices have risen even further, due to the cut-off of Russian supply.
The cost of fossil fuels is constantly growing, and as a result, Ofgem recently said that the price cap will rise to £3,549 in October. This means that annual energy costs for those on the default or standard variable rate (SVR) plan from their supplier would rise by £1,578.
However, Liz Truss announced a new set of measures to combat crippling energy bills ahead of the winter and beyond. The measures come just two weeks after Ofgem raised its price cap to £3,549 per year. Following the announcement, the energy price freeze will be set at £2,500 for a typical household from 1 October for two years, saving around £1,000 from Ofgem’s previously announced price cap of £3,549. Though unfortunately, It is still a 27% increase over the current price cap of £1,971.
What is the energy price cap?
The maximum price that energy suppliers may charge for their products is set by the price cap, which keeps track of wholesale energy costs. In response to worries that many people were paying too much for their energy, Ofgem implemented it in 2019. The standing fee (a set daily amount you must pay for energy regardless of how much you use) and the cost of each individual unit of energy (measured in pence per kilowatt hour, or p/kWh) are both included in the price cap.
Customers on a default or standard variable rate energy tariff have been subject to an energy price cap since 2019 under the legislation of the energy regulator Ofgem. For individuals who use prepayment metres, Ofgem also implemented a price cap in 2017. Each price cap aims to safeguard clients from having to pay excessive energy costs.
What changes has the price cap seen this year?
The default energy price cap was about to increase from £1,971 to £3,549 in October 2022, raising annual household energy expenses by £1,578. This represented an increase in the energy price cap of 80%. However, with the new measures announced by Truss, this price cap will be considerably less.
The new Energy Price Guarantee will be in effect for two years and will fix unit rates for domestic customers. Energy prices for suppliers will continue to fluctuate, but the government will pay the excess rather than the customers.
The assistance is intended to be available to all households, including those who will not receive the previously announced £400 electricity bill discount.
The cuts will be made to unit rates rather than standing charges, which will remain the same as set by Ofgem for October 2022.
Ofgem also announced that in October 2022 they would change to a quarterly price cap that would be revised every three months rather than every six.
How does the energy cap affect me?
The price caps only apply to the rates you pay for energy, not the amount you pay for your monthly energy bills. However, the energy cap shouldn’t apply to people on fixed rate tariffs.
Most fixed rate tariffs already charge a rate that is less than the cap. Typically, after your fixed term expires, you are switched to your supplier’s usual variable rate, and from that point forward, the energy cap will apply to you.
Currently, fixed rate agreements are generally more expensive than a supplier’s typical variable rate tariff due to the escalating costs of wholesale electricity. This is important to bear in mind if your fixed rate contract is about to expire.
Your supplier will have to cut their prices if you are on a default tariff and the cap is lower than your current cost per unit of energy. In the same way, your supplier will probably raise your bills to these rates if the cap levels go up, so you might end up paying more.
Unfortunately, there is little possibility that you will be able to switch energy suppliers in order to save money. Staying on your supplier’s ordinary variable rate for the time being may be preferable to switching to an expensive fixed rate tariff that might be in effect for one to three years. It’s a good idea to keep a track on the energy market so you can be prepared to switch when energy discounts become available once more.
Rates will vary slightly depending on where you live and the type of tariff you choose. The assistance package recently announced will be applied to your energy bills automatically, and you will not be required to do anything.
For direct debit customers, the new unit rates will be an average of:
Electricity costs 34p per kWh, with a daily standing charge of 46p; gas costs 10.3p per kWh, with a daily standing charge of 28p.
These will be critical in determining how much you will pay overall.
To find out how much you’re likely to pay over the year, multiply your annual usage in kWh for each fuel (this should be on your energy bills, but you can estimate it yourself) by the rates listed above. Remember to divide the price by 100 to get the price in pounds rather than pence. You’ll also need to budget £270 per year to cover the average standing charges if you pay for both fuels. If you pay by direct debit, your payments should be roughly this total divided by 12.
These numbers are based on someone with average consumption, which is why your bill is likely to differ significantly from these prices.
A look into the future
The government’s plan includes proposals to “accelerate domestic energy supply” by increasing fossil fuel production in the UK, in addition to the price freeze. However, it is our reliance on fossil fuels that has exposed us to the volatility of international energy markets in the first place.
Throughout the crisis, the cost of renewable energy has been consistently lower than that of fossil fuels, and it does not experience the same price increases as oil and gas traded on wholesale markets. The sooner we can transition our electricity system to locally generated renewable heat and power, the sooner we will be free of the volatility of fossil fuel markets and the emissions produced by these sources.
This, along with the rapid implementation of energy efficiency programs that prioritise the fuel poor, is the only way to end fuel poverty and avoid another crisis in the future.
