Price cap: Why energy bills are going up when wholesale prices are down
Households in England, Scotland and Wales are facing a slight increase in their energy bills from 1 January after Ofgem announced the next price cap increase.
The regulatory change will see typical annual energy costs rise by 0.2 per cent, equivalent to an additional £3, bringing the total to £1,758 for those paying directly for gas and electricity.
The adjustment comes as expectation grows that the Chancellor may announce additional energy bill support measures in his autumn budget, scheduled for 26 November.
As questions emerge about the reasons behind the cap increase and the nature of the aid to come, experts are closely watching details about potential government interventions.
What does the energy price cap mean?
The energy price cap sets the maximum price energy suppliers can charge consumers in England, Scotland and Wales for each kilowatt hour (kWh) of energy they use.
Figures provided by Ofgem show how much a household using gas and electricity and paying via direct debit could expect to pay if energy consumption was normal.
It’s important to note that this doesn’t limit a home’s total bills, because people still pay for the amount of energy they use; that is, they will pay more if it is above average and less if it is below it.
In Northern Ireland energy is regulated separately.
Why is the ceiling price increasing?
The price cap is usually driven up or down depending largely on wholesale costs of energy, but that’s not the case this time.
Ofgem said wholesale prices were currently “stable” and had fallen by 4% in the last three months.
The regulator said the price cap change was due to government policy costs and operating costs.
In particular, charges now take into account the Nuclear Regulated Asset Base (RAB) tax to help finance next-generation nuclear power stations, including the Sizewell C plant in Suffolk, which will add around £1 a month to bills.
It also includes payment for the Government’s Warm Home Discount scheme, which means the increase in the price cap for standard charges (costs set by suppliers) means a one-off £150 discount on electricity bills for eligible households.
What measures could be included in the budget?
Experts say the price cap increases pressure on the Government to provide more cost-of-living support to households, especially those most vulnerable to rising costs.
Speculation is mounting that the Chancellor may scrap the 5% VAT on energy bills in his budget statement next week.
Forecasters at Cornwall Insight said removing VAT would save around £80 million from the January bill.
Other potential measures include changing or removing certain taxes included in bills.
Dhara Vyas, chief executive of Energy UK, said the industry would like to see the Government take steps to reduce bills, such as “removing some taxes on electricity costs”.
Dame Clare Moriarty, chief executive of Citizens Advice, said: “In next week’s Budget, the Government should reduce electricity bills by shifting some policy costs to general taxation or distributing them more equally between gas and electricity.
“This could reduce electricity bills by hundreds of pounds, especially for those with the tightest household budgets.”
What did the government say?
The Labor Government has made an election promise to cut people’s energy bills by £300 a year by 2030.
A Number 10 spokesman said on Friday they were “committed to delivering this cut to energy bills”, adding: “We know energy bills are still very high.
“That’s why we’re taking immediate action to ensure millions of families get £150 off their bills this winter through the expanded warm homes discount scheme.”
Downing Street also said “making Britain a clean energy superpower” would reduce the country’s dependence on international fossil fuel prices and be the way to “lower bills in the long term”.
But shadow energy secretary Claire Coutinho said: “Ed Miliband has promised to cut everyone’s energy bills by £300 but more and more experts are sounding the alarm that his plans will leave us paying higher bills for decades to come.
“Despite gas prices falling, independent experts, energy suppliers and academics say it is the extra costs of Ed’s net zero targets that are putting upward pressure on bills.”
