A squeeze on household finances will become more acute as a new, higher energy price cap takes effect.
Those on standard tariffs with typical household energy use will see their bills rise by £139 to £1,277 per year, but the more energy a household uses, the higher their bill.
Customers with prepayment metres who use average amounts of energy will see a £153 increase.
The cap has come under scrutiny as a result of the supplier crisis, which has resulted in the closure of nine businesses.
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The cap limits the amount that providers can raise their prices. Nonetheless, the current increase is the largest jump, to the highest amount, since the backstop was implemented in January 2019.
It represents a 12% rise in energy prices at a time of the year when, charities point out, people are about to use more heating and lighting during colder, darker days. It also coincides with other price rises hitting family budgets and the withdrawal of Covid support schemes, although the government has promised to continue financial help for the poorest households.
About 15 million households in England, Wales and Scotland are affected by the changes.
The cap does not apply in Northern Ireland where prices are overseen by a regulator.
How the cap works
Domestic energy price caps are set by the regulator Ofgem twice a year. The most recent level went into effect on October 1st.
It is a limit on the amount of energy that can be sold and the fees that suppliers can charge. The amount of gas and electricity used by a household still determines the total bill.
The latest change means:
- Those on standard tariffs, with typical household levels of energy use, will see an increase of £139 – from £1,138 to £1,277 a year – to their bill
- People with prepayment meters, with average energy use, will see an annual increase of £153 – from £1,156 to £1,309
- Households with larger than average energy use will have a higher annual bill
Households on fixed tariffs will not be affected, but those nearing the end of a contract will be automatically switched to a default tariff set at the new level. Customers used to be able to shop around for better deals, but due to the high price of gas, they won’t be able to do so any longer.
“The massive devastating increases in energy prices will drive over 500,000 more households into fuel poverty, leaving them unable to heat or power their homes,” said Adam Scorer of the fuel poverty charity National Energy Action.
‘Where’s the extra money coming from?’
Debbie Wright is about to move into her first flat, but she says rising energy bills and lower benefits payments are dampening her enthusiasm for potential independence.
“It’s terrifying; you can’t afford to live day by day,” she explained.
“Where did the extra cash come from?”
She was taking a life skills class offered by the charity Christians Against Poverty. All of the students in the class had prepayment metres and were receiving food parcels.
“We’re seeing all kinds of people in debt,” said Shirley Bowen, a life skills manager.
“People have always struggled to manage their finances, and I don’t think that will ever change.” When they encounter an unexpected expense, it knocks them off balance and forces them to seek assistance.
“It’s only going to get worse.” It is obvious that some people will not turn on their heating this winter. We’ll have to wait and see if they’ll be able to cook for their kids, or if it’ll just be sandwiches and cereal.”
How to save money
Typically, the introduction of higher energy bills is accompanied by advice to consumers on standard tariffs to switch to a lower-cost deal.
Because of the sector’s current crisis, there are no better offers available at this time. The most competitive tariff available is one set at the price cap limit.
Instead, residents are encouraged to save money by examining their homes’ energy efficiency. According to the Energy Saving Trust, the price increase could be more than offset by changes in our homes and habits.
“We can’t lose sight of the long-term solution to reduce energy waste in our homes,” said Mr. Scorer of National Energy Action. We have some of Europe’s least efficient housing.
“As a result, the UK is more vulnerable to the current soaring gas prices than many other countries, and we waste billions of pounds each year as heat escapes through leaky roofs, floors, and ceilings.”
Price cap is tough for suppliers
The new cap was decided in August and is designed to reflect the unavoidable costs faced by energy suppliers.
This came slightly ahead of a massive jump in wholesale gas prices which has led to the collapse of nine suppliers in recent weeks. They have been unable to keep to the price promises they made to their customers, and were uninsured against the increasing costs.
Avro Energy, for example, confirmed that it had gone into administration on Friday. Customers will be transferred to Octopus Energy, while its 103 employees will be retained for the time being to assist with the transition.
Tariffs for the 1.7 million customers who are switching to new suppliers after their previous provider fails are set at the same level as the new price cap.
Senior executives from larger suppliers have claimed that the price cap is exacerbating the situation. They claim they are incurring billions of pounds in additional costs as a result of providing customers with energy that costs more to purchase than they are permitted to sell it for under the retail price cap.
“It costs around £600 to take on a new customer at the moment because of the astonishing price of gas in the market,” Emma Pinchbeck, chief executive of Energy UK, the trade association for the energy industry, told the BBC’s Today programme.
Given the current “volatile” gas market, she predicted that more energy suppliers would fail.
Firms have chastised Ofgem, claiming that it should have anticipated that many smaller suppliers would not be resilient in the face of rising gas prices.
Ofgem CEO Jonathan Brearley dismissed the criticism, claiming that no one could have predicted the massive increase in wholesale gas prices.
He acknowledged that the cost of protecting customers from failing energy providers could result in future bill increases.
The next price cap, which analysts predict will be significantly higher, will be decided by Ofgem in February before going into effect at the beginning of April.
“We are doing everything we can to ensure that consumers, particularly those in vulnerable circumstances, do not pay more than is absolutely necessary this winter,” said a spokeswoman for the regulator.
“Higher energy costs are never welcome news, and the timing and magnitude of this increase will be especially difficult for many families who are still dealing with the effects of the pandemic.” Anyone having difficulty paying their energy bills should contact their supplier to find out what assistance is available.”