Energy bills to rise by more than £100 for 15m households as price cap lifted | Business

Around 15m households will see their energy bills increase by more than £100 a year from April after the regulator Ofgem said it was lifting two price caps because of rising wholesale costs.

Big energy suppliers are expected to increase their prices by £117 for 11m customers on default tariffs to a new ceiling of £1,254 a year for a home with typical use, leaving many consumers paying more for their electricity and gas than before the flagship policy took effect on 1 January.

Consumer groups said the rise was “eye-watering” and would be a shock for people who thought the cap would stop their bills from rising.

The significant increase, which wipes out the average saving of £76 from the cap, will be embarrassing for ministers, who promised that people would save money under the flagship policy.

The 10% rise is on a par with the worst by the big six energy suppliers over the past two years, many of which the government claimed were unjustified.

Comparison sites, which are opposed to the cap, branded the increase “brutal”, “jaw-dropping” and the “worst possible start for the energy cap”.

Ofgem also announced a rise of £106 a year to £1,242 for a further 4m households on prepayment meters, who are typically more vulnerable customers.

How does the energy price cap work?

The cap, one of the biggest shakeups of the energy market since privatisation, came into effect on 1 January for 11m households on default tariffs, known as standard variable tariffs (SVTs). The government told the energy regulator Ofgem to set the cap because ministers argued people on SVTs were being ripped off by big energy firms capitalising on consumer loyalty. The limit is not an absolute one, but the maximum suppliers can charge per unit of energy and for a standing charge. There is a separate cap for 4m homes on prepayment meters, which are also going up.

If it is a cap, why have prices gone up?

It’s not a freeze, it’s a movable cap. That’s £1,137 today based on typical energy use, rising to £1,254 from 1 April. The reason is that the wholesale prices of electricity and gas, the biggest variable influencing prices, have increased. 

Is there any way to avoid the increase?

Yes. Spend a few minutes on one of the many comparison sites, or sign up to an auto-switching service, and move to a cheaper tariff, either with your existing supplier or a rival one. Fixed tariffs, which are not covered by the cap, are almost always much cheaper than SVTs, though there are exceptions, so watch out. Several smaller suppliers also offer good customer service and variable tariffs that are well below the cap. 

Could bills fall soon?

It looks likely, despite this week’s announcement. Ofgem said wholesale costs had begun to fall recently. If that pattern continues, it expects to lower the price cap in October. The energy analyst Cornwall Insight expect a fall of around £50 for a typical annual dual fuel bill. Bulb, one of the fastest-growing challenger firms, said wholesale costs had fallen 10% between last September and January, and if the trend continued it would drop prices in 2019. Small supplier Pure Planet cut a typical customer’s energy bill by £12 this week.

Together, the increases in the two caps will add a collective £1.71bn to consumer bills, according to the auto-switching site Look After My Bills.

Ofgem insisted consumers were paying a fair price for their energy despite the increases. The regulator said it had to raise the caps because wholesale costs facing energy firms had increased by 17% and other costs had climbed, too.

“We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering,” the regulator’s chief executive, Dermot Nolan, said.

The regulator said its analysis suggested without the cap people would be “paying significantly more even after the increase” of the cap in April.

The government said the higher caps reflected sharp increases in electricity and gas costs.

Claire Perry, the energy minister, said: “We were clear when we introduced the cap that prices can go up but also down.”

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Gillian Guy, the chief executive of Citizens Advice, a consumer group that backs the cap, said: “As unwelcome as this news is, it’s likely that prices would be higher still without the cap and there are steps people can take to ease the strain on their bills.”

Industry body Energy UK said suppliers of all sizes were facing “drastically rising costs”.

However, there are signs of some relief on the horizon for consumers later this year.

Nolan told The Guardian wholesale costs had begun to fall recently, a trend which could see the regulator announce a lower cap in August, to take effect from October.

“If they [wholesale costs] do indeed continue to fall… there is a reasonable chance of a price decrease in October,” he said.

Energy analysts Cornwall Insight said that, based on wholesale prices it had seen in January, households could expect a £50 decrease in the cap in October.

One of the big six companies, npower, last week blamed 900 job cuts on the cap and competition. Nolan said he was disappointed the big six had priced so close to the initial cap but suggested smaller, cheaper suppliers would “continue to grow” as a result.

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