Energy price cap: Households face surprise price rise in the new year

Millions of households will see a slight rise in gas and electricity prices in the dead of winter, after regulator Ofgem outlined its next price cap.

The 0.2% increase on the current limit will come into force at the beginning of January and will affect those with variable tariffs in England, Wales and Scotland.

The increase came as a surprise after forecasters suggested the cap could fall early in the year. Government policy is behind the change.

Gas and electricity bills remain relatively high, and the sudden drop in temperature has put costs at the forefront of people’s minds.

“Although wholesale energy costs are stabilizing, they still account for the majority of our bills, leaving us exposed to volatile prices,” Ofgem’s Tim Jarvis said.

Prices will be slightly lower than the same period last year, but Jarvis said the cap was a backup and people could take steps – such as looking for a fixed rate – to reduce their bill.

Ofgem said the price cap change was driven by government policy costs and operational costs, such as funding the Sizewell C nuclear project.

Dame Clare Moriarty, of Citizens Advice, said: “With bills still drastically higher than before the energy crisis, and set to rise again from April, it is time to make decisions about the long term.”

The cap sets the maximum price that can be charged for each unit of gas and electricity, not the total bill, so those who use more energy pay more.

Ofgem’s limit is illustrated by a household consuming a “typical” amount of 11,500 kWh of gas and 2,700 kWh of electricity per year with a single gas and electricity bill, settled by direct debit.

This illustrative household would see a £3 increase in their annual bill from £1,755 to £1,758.

However, the amount used varies significantly between households, so the best way to calculate the change is to calculate the percentage change from your usual annual bill.

Charities say they are seeing people owing increasing levels of unpaid bills and charges to suppliers.

The total amount owed has reached a record £4.4bn, prompting Ofgem to draw up plans to ensure energy companies write off some of that debt.

Up to £500m could be cut from the total under plans the regulator wants to come into force early next year.

Dhara Vyas, chief executive of Energy UK, which represents suppliers, said anyone struggling to pay should contact their energy supplier as soon as possible.

“We know that too many people are struggling to pay for the energy they need to use,” he said.

But he added that suppliers could help with efficient appliances, tailoring the rate to customers’ needs or making sure people received the right benefits.

Energy consultancy Cornwall Insight, which expected the cap to fall slightly, said Ofgem’s announcement marked “the start of a potential trend” in which the main driver of higher bills would be government policies rather than higher wholesale energy prices.

Lead consultant Dr Craig Lowrey said households faced a further rise in bills in April due to the costs of running the energy grid and the transition to net zero emissions.

But he added: “A low-carbon system means more energy security and less exposure to the rollercoaster of fossil fuel prices.

“These upfront costs represent an investment in long-term stability and affordability, and that is a message we must keep at the forefront, without ignoring the critical issue of immediate affordability for both households and businesses.”

The government has hinted at additional cost of living support in the 26 November Budget.

One option said to be being considered is removing VAT from energy bills, which would shave around £80 off annual bills.

Dr Lowrey claimed any support would be “zero sum” and would simply “make energy bills look lower”.

“These costs will still need to be recovered, whether through bills or taxes, as the pipes, cables and networks that keep the lights on still need investment as we move towards a cleaner, safer energy system,” he added.

Energy Minister Martin McCluskey said: “We know energy bills are still too high. That’s why we are taking immediate action, and millions more families will receive £150 off their bills through the expanded Warm Home Discount scheme this winter.”

But the Conservatives said Labour’s net zero emissions policies are “making energy unaffordable”.

Shadow energy secretary Claire Coutinho said: “Ed Miliband promised to cut everyone’s energy bills by £300, but more and more experts are sounding the alarm that his plans will force us to pay higher bills for decades.

“Despite falling gas prices, independent experts, energy suppliers and academics say it is the additional costs of Ed’s Net Zero targets that are putting upward pressure on bills.”

In the meantime, as cold weather arrives, there are several tips available to keep people warm while controlling costs, including clothing, insulation, and heating the rooms people are in rather than the entire house.