Ofgem increases price cap by £730

Ofgem has confirmed the price cap on default tariffs for direct debit customers will rise by £730 – or 21% – from January to £4,279 due to rising wholesale costs.

The hike will have a more limited impact on the 26 million households on standard variable tariffs whose rates will continue to be subsidised by the government to freeze annual energy bills for a typical dual fuel customer at £2,500 under the Energy Price Guarantee. The main effect of the change will instead be to determine the size of subsidies the government will need to provide to keep bills at this level whilst allowing companies to recover the fair costs of supplying energy as established by the price cap.

The vast majority of the increase is the result of higher wholesale costs. This element of the price cap will increase by £669 – or 28% – to £3,177. Ofgem said the indexed components of the cap such as operating costs, profits, VAT and headroom will also rise in line with the overall increase in the price cap, although Contracts for Difference costs will decrease by £17 to reflect increased paybacks by contracted generators.

There will be larger increases in the price cap for those paying by methods other than direct debit, with the cap rising by £769 to £4,500 for standard credit customers paying by cash or cheque, and by £755 to £4,358 for the roughly 4 million customers on prepayment meters. Like the price cap itself, the capped unit rates under Energy Price Guarantee also vary depending on payment type as well as region.

Peter Smith, director of policy and advocacy at National Energy Action, said: “Despite households being shielded from the full extent of price rises due to the UK government’s Energy Price Guarantee, there has been a big increase depending on how households pay for their fuel bills.

“If you pay by cheque or cash, you will pay £254 more than Direct Debit customers and £80 more if you are on prepayment meter next quarter. In total these customers will be paying over £1.1 billion per year more from January – an increase of more than £200 million compared to the last cap period – despite these customers often living on lower or fixed incomes.

“These differences add up and have a big impact for those struggling to pay their bills and are not cancelled out by the UK government’s Energy Price Guarantee. People shouldn’t be punished because of how they pay their bills. Many have little or no choice. Unless the government steps in, unfair differentials on this scale will persist.”

When first unveiled in September by the prime minister at the time, Liz Truss, the Energy Price Guarantee (EPG) was due to freeze prices for a two-year period starting the following month.

After Rishi Sunak replaced Truss as prime minister in October, his new chancellor Jeremy Hunt initially announced that the EPG would be cut short, only being offered until the beginning of April 2023. However, in his Autumn budget statement last week, Hunt revealed that the EPG would be extended until April 2024 but at a higher level of £3,000.

Craig Lowrey, principal consultant at Cornwall Insight, said the latest price cap rise will be concerning for the government, which will be “shouldering the billions of pounds” needed to compensate suppliers for the difference between the price cap and the EPG.

“While the January price cap was locked in last week, the rise in wholesale market prices has led to an increase in our price cap predictions from April 2023 onwards,” he added.

“With these increases passed on to the government through payments associated with the EPG, in just one week our estimate of the full cost of 18 months of the EPG has jumped from approximately £38 billion to £42 billion. This is even allowing for the increase in the EPG from £2,500 per year equivalent to £3,000 per year equivalent.”

Lowrey said this highlights the “acute” risks that the government has taken on by extending the EPG to April 2024, leaving it “exposed to variables and factors over which they crucially have no control.”

He continued: “With so many households struggling to pay their bills, it is essential that support is made available, however it is clear that the EPG is not a desirable long-term solution. The review into domestic energy prices which has been signalled by the government will hopefully be the catalyst for a strategy to implement a long-term support solution.”

With energy prices expected to remain “above historic levels for many years to come,” Lowrey said more targeted support for the most vulnerable customers is likely to be needed on enduring basis if the government is to stabilise its finances: “The earlier this work begins the more easily some of the complexities in designing a more focussed scheme can begin to be addressed. One thing is clear, I think everyone accepts that it is not tenable to go on dealing with this situation in six month blocks of emergency measures.”

Dhara Vyas, Energy UK’s director of advocacy, said: “Energy companies have put in place lots of additional measures to support their customers, especially those most vulnerable, as prices have continued to rise.”

She added: “Energy UK and its members are working with government and the regulator on how to ensure people get the support they need when the current Energy Price Guarantee rate ends in April 2023.

“We will continue to work closely with industry, government and other business groups to ensure businesses are also well supported with rising energy bills.”