Energy price cap rises by 80%

Energy price hikes will cause ‘stress, anxiety, illness, debt and death’

Today (26 August) Ofgem has announced the energy price cap will increase to £3,549 per year for dual fuel for an average household from 1 October 2022.  

This comes as Ofgem’s CEO warns of the hardship energy prices will cause this winter and urges the incoming Prime Minister and new cabinet to provide an additional and urgent response to continued surging energy prices.  

The new price cap level is based on a transparent methodology and calculations by Ofgem. The data is published on the Default tariff cap level: 1 October 2022 to 31 December 2022 publication.

The increase reflects the continued rise in global wholesale gas prices, which began to surge as the world unlocked from the Covid pandemic and have been driven still higher to record levels by Russia slowly switching off gas supplies to Europe.  

The price cap, as set out in law, puts a maximum per unit price on energy that reflects what it costs to buy energy on the wholesale market and supply it to our homes. It also sets a strict and modest profit rate that suppliers can make from domestic energy sales. However, unlike energy producers and extractors, most domestic suppliers are currently not making a profit.

The price cap protects against the so called ‘loyalty premium’ where customers who do not move suppliers or switch to better deals can end up paying far more than others. Ultimately, the price cap cannot be set below the true cost of buying and supplying energy to our homes and so the rising costs of energy are reflected in it.  

Although Ofgem is not giving price cap projections for January because the market remains too volatile, the market for gas in Winter means that prices could get significantly worse through 2023.

Jonathan Brearley, CEO of Ofgem, said: “We know the massive impact this price cap increase will have on households across Britain and the difficult decisions consumers will now have to make. I talk to customers regularly and I know that today’s news will be very worrying for many.  

“The price of energy has reached record levels driven by an aggressive economic act by the Russian state. They have slowly and deliberately turned off the gas supplies to Europe causing harm to our households, businesses and wider economy. Ofgem has no choice but to reflect these cost increases in the price cap.

“The Government support package is delivering help right now, but it’s clear the new Prime Minister will need to act further to tackle the impact of the price rises that are coming in October and next year.

“We are working with ministers, consumer groups and industry on a set of options for the incoming Prime Minister that will require urgent action. The response will need to match the scale of the crisis we have before us. With the right support in place and with regulator, government, industry and consumers working together, we can find a way through this.”   

Ofgem will continue to work with government, consumers groups, charities and suppliers, in supporting any new package of help or measures to ease the crisis.

Ofgem has also today strengthened the rules around direct debits to ensure suppliers set them at the right level, meaning that customers only pay exactly what they need to. The changes will stop suppliers from building up excessive customer credit balances and using them in a risky way as working capital.

Ofgem’s clear role is to protect consumers, and it has also today:

• Strengthened requirements for suppliers to have sufficient control over the key assets they use to run their businesses. Together, this and the direct debit rule changes build on existing requirements to boost supplier resilience to better protect customers from costs associated with supplier failures.
• Extended the Market Stabilisation Charge (MSC), which is paid by suppliers and helps protect customers from the cost of supplier failure.
• Extended the ban on acquisition only tariffs which ensures all energy tariffs are available to existing as well as new customers, ensuring all consumers can get a fair deal on their energy.
• Launched a review into the mechanism and level of profit margin available under the price cap to ensure that suppliers do not earn excessive profits and receive only a fair return for the services they provide to customers.

The new price cap level will take effect from 1 October 2022, but it is possible some suppliers may begin increasing direct debits before this date to spread costs. Customers worried about when their direct debit will increase should contact their supplier. Any money taken from customers to build up a credit will only ever be spent on their energy supply and customers can ask for their credit balance to be returned at any time.  

Anyone worried about paying their bill should contact their supplier in the first instance. They are obliged to discuss payment plans and direct customers to government and third sector support where available. Ofgem is tightly monitoring suppliers’ performance in this area and has told all suppliers now is the time to step up their support for customers, especially those on low incomes or in a vulnerable situation.  

Ofgem continues to monitor the impact of the price cap and to work with stakeholders and government on what more can be done for those least able to pay but most in need of energy.

When the new Prime Minister announces what additional support packages will be available, Ofgem will continue to examine how best it can help those groups of people that need it the most.  

Reacting to today’s announcement by Ofgem, Poverty Alliance director Peter Kelly said: “The first moral duty of government is to protect people and provide them with security. The UK Government and Ofgem are failing badly in that duty and acting without any sense of compassion and justice.

“This massive price hike is in line with predictions. Ministers knew this was coming for months but have put nothing in place to prevent a humanitarian disaster.

“We must be clear. Bills of this size will be completely and utterly unaffordable for people on low incomes, many of whom have already been struggling with cuts to social security and huge wage squeeze for years and years. They will cause stress, anxiety, illness, debt and death.

“The UK Government must act now. It is simply not right that they continue to dither – prices must be frozen and targeted support must be put in place to help those most in need.”

Chancellor of the Exchequer, Nadhim Zahawi said: “I know the energy price cap announcement this morning will cause stress and anxiety for many people, but help is coming with £400 off energy bills for all, the second instalment of a £650 payment for vulnerable households, and £300 for all pensioners.

“While Putin is driving up energy prices in revenge for our support of Ukraine’s brave struggle for freedom, I am working flat out to develop options for further support. This will mean the incoming Prime Minister can hit the ground running and deliver support to those who need it most, as soon as possible.”

He later told the public to cut back their energy consumption – this from the man who once claimed parliamentary expenses for heating his stables!

This morning, Ofgem announced that the energy price cap will rise by 80%, taking typical household bills from £1,971 a year to £3,549 a year on 1 October.

People will rightly be worried by these huge price hikes. These eye-watering increases will simply be unaffordable for households up and down the country.

We’re demanding the government increase its support package for every household to at least £1,000, with extra support for the most financially vulnerable, or risk pushing millions of households into financial distress this winter. We also expect energy suppliers to ensure their customer service centres are adequately resourced to resolve queries quickly and help those struggling to pay their bills.

Are you concerned what the price cap rise could mean for you? Find out more about today’s news and use our tool to calculate what the price cap rise means for your own payments.

THE Government needs to spend £100 billion to freeze household energy prices for a year, according to an industry expert. Derek Lickorish, chairman of retailer Utilita Energy, told GB News: “Back in the banking crisis, Gordon Brown found £500 billion pounds to stop the banks falling apart and I’m advocating that we’re looking at about £100 billion to freeze prices for one year.

“At the moment, we don’t know what Liz Truss is bringing to the party and we don’t know whether it’s going to meet the size of the gap.

“While we have a price cap , when we get to the first of January, that figure is going to have a five in front of it, and it’s going to be another couple of thousand pounds and people cannot possibly afford to pay that amount of money for their energy bill.”

Speaking to Alastair Stewart on GB News, he added: “I think the area that needs to be looked at quite closely is the market structure, in terms of the way electricity is bought and sold, and I know there are plans to look at this now with some urgency.

“But you have a situation where you’re bringing on to the network power that has been effectively subsidised by the renewables obligation, yet they are getting these huge prices in terms of generation because the market price is set by gas.

“The wind doesn’t cost any more. The sun doesn’t cost any more. But these schemes are making an awful lot of money. 

“To be fair, that’s about solutions that were brought in prior to 2017, so there was a change so that renewable projects from 2017 would get the price that they agreed.”

Asked to make a final point, Mr Lickorish said: “I want the Government to tell us what’s happening and it needs to be a very, very big number that we need to know now.

John Redwood MP, who has been tipped for a post in a new administration, suggested that VAT on energy will be scrapped for businesses when a new Prime Minister is in place.

“Cancelling VAT on fuel, at least temporarily while fuel costs are elevated, is a serious runner and any new government team will want to look at that,” he told Liam Halligan on GB News.

“I certainly agree with you that there are a lot of businesses under a lot of pressure and I think that must be part of a comprehensive package to explain to industry what help might become available.

“And what can be done about the excessive fuel bills that will directly now lead to some closures, as we’ve heard recently.”

Commenting on the energy price cap rise announced today, Crispin Truman, chief executive of CPRE, the countryside charity, said:  ‘This winter’s energy bills are a ticking time bomb threatening to blow apart household finances.

“Rural areas, where wages are lower and homes often cost more to heat, will be devastated if the full force of the price rises are felt by consumers. The government must step in to prevent those living in the countryside from having to choose between eating and heating this winter. 

‘We’ve been here before in the pandemic – the country is entering a national crisis that requires an emergency response. Ministers must urgently put in place direct financial support to get people through the winter, while working to deliver the only viable long term solution – improving the energy efficiency of our homes. 

‘In addition to stratospheric energy bills, the cost of living crisis is being driven by a lack of housing and soaring rents for millions in the private rented sector. Homelessness is rising as half a million people languish on social housing waiting lists. In the Eden district of Cumbria, homelessness rates are more than four times what they were in early 2020. 

‘Twiddling with taxes won’t cut it. To ease the cost of living crisis the government needs to provide immediate monetary support. To prevent a generation of rolling winter crises, we need to get off gas and rapidly invest in home insulation and cheap renewable energy. A longer term fix must also include providing many more social and affordable homes.’