The energy price cap is the maximum amount a utility company can charge an average customer in the UK per year for the amount of electricity and gas they use, preventing businesses from simply passing on cost increases to the consumer.
But the cap, set by the regulator Ofgem and first introduced in January 2019, only applies to customers who are on a standard variable tariff, typically a provider’s default and most expensive option.
It does not safeguard consumers against global market fluctuations and does not limit an individual’s overall bill – if you use more than the “average user”, you still pay more.
The rate is reviewed every six months and the latest cap, announced on 3 February 2022, ushered in a rise of 54 per cent, meaning a steep increase in household bills this spring.
As of 1 April 2022, the cap rose from £1,277 to £1,971 for a household on average usage. That means a £693 per year increase for the average customer.
Prepayment meter customers likewise saw an increase of £708 from £1,309 to £2,017.
Jonathan Brearley, chief executive of the energy regulator Ofgem, said: “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.”
The last review on 6 August 2021 was itself a rise of 12 per cent or £139 on six months earlier and, in worse news, Mr Brearley has since told the House of Commons’ Business, Energy and Industrial Strategy Committee that he is expecting the cap to rise again in October, putting the cap “in the region of £2,800”.
That last development promises a dire winter for British households when the cost of living is already spiralling, with inflation now at a 40-year high of 9 per cent.
Russia’s disastrous war in Ukraine has only added to the straitened state of affairs in the UK and elsewhere, given that the aggressor is a key supplier of energy to continental Europe.
The Independent’s James Moore has likened the prospect of higher bills to “an Arctic wind blowing through people’s personal finances”.
Chancellor Rishi Sunak has already announced that £150 council tax rebates would be given to homes in bands A to D and unveiled plans to offer a £200 discount on bills but is under pressure to do more.
Dale Vince, the boss of Ecotricity, was quick to call the chancellor’s intitial measures “far too little, far too late”.
Responding in the Commons, Labour’s shadow chancellor Rachel Reeves likewise called Mr Sunak’s plans a “buy now pay later scheme that loads up costs for tomorrow”.
The opposition is now pushing the government to bring in a one-off tax on North Sea oil and gas producers, who are among those to have benefited from big increases in prices this year.
Mr Sunak could use the proceeds from a windfall tax to upgrade the earlier £200 cut to energy bills and is reportedly looking to make the existing Warm Homes Discount scheme more generous.
Overall, the government is thought to be considering a spending package of as much as £10bn but that would still be insufficient, according to the Resolution Foundation think tank, which argues that £15bn is needed to help people on lower incomes through the crisis.
Addressing the coming squeeze on household finances on his ITV show earlier this year, the ever-resourceful money saving expert Martin Lewis was, for once, forced to admit he was stumped by the prospect of tackling such a dramatic increase in power costs, saying he was left “shaking” and “near tears” in frustration at being unable to help a single mother unable to meet her bills.
“There are lots of people out there that can afford the increase and won’t like it, but there are also millions of people who will be thrown into fuel poverty, who will get close to having that choice between heating and eating,” he warned his audience.
As Ofgem itself has done, Mr Lewis advised his viewers to speak to their supplier about possible payment plans and suggested households check whether they are eligible for the Warm Home Discount or Winter Fuel Payment.
Given that the cheapest energy tariffs offered are usually approximately £200 below the energy cap, the customary guidance is to switch providers regularly to ensure you get the best deal and lock in the present low price for at least 12 months.
But such is the current state of uncertainty that even that piece of conventional wisdom is in doubt.
“In normal circumstances, switching is a good way to beat the price cap and save money. However, due to unprecedented conditions in the energy market right now, we’re changing the habit of a lifetime and advising our customers that switching might not be the right thing to do at the moment,” the price comparison site Moneysupermarket has advised its users.
Mr Lewis was broadly in agreement when he told subscribers to his weekly email: “It looks like most people should do nothing (no certainty, I don’t have a crystal ball), it looks like only a few edge cases should be looking at fixing right now. So if in doubt, just stick on today’s cheapest price – which is the cap.”