Ofgem has announced its price cap will fall by almost £1,000 from April - but energy bills for households are still set to rise by £500.
The energy regulator has confirmed its price cap will drop from £4,279 a year to £3,280 from April to July for the typical home paying by direct debit.
But households are currently covered by the Government Energy Price Guarantee - which is set to increase from £2,500 a year to £3,000 from April.
This means bills will go up by around 20% for the average home.
At the same time, the £400 energy rebate scheme - paid in six instalments of £66 and £67 a month - is coming to an end in March.
If you factor in the loss of the rebate scheme, this means the energy cost for households will increase even more this spring.
Ofgem CEO Jonathan Brearley said: "Although wholesale prices have fallen, the price cap has not yet fallen below the planned level of the Energy Price Guarantee.
"This means, that on current policy, bills will rise again in April. I know that, for many households this news will be deeply concerning."
In a glimmer of hope for consumers, Mr Brearley said energy bills could fall this summer if the reduction in wholesale prices continues.
But he warned: "However, prices are unlikely to fall back to the level we saw before the energy crisis.
"Even with the extensive package of government support that is currently in place, this is a very tough time for many households across Britain."
He also suggested social tariffs for the most hard-up households could soon become an option.
He said: "We also think that, with bills continuing to be so high, there is a case for examining with urgency the feasibility of a social tariff for customers in the most vulnerable situations."
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: "The energy price cap has plummeted a massive £999, revealing that the energy price guarantee isn’t going to be anywhere near as expensive as was originally feared.
"This provides the Government with an opportunity to consider more tailored support in the Budget.
"It’s going to feel particularly unfair in April when the energy price guarantee jumps by a fifth, to £3,000 – at a time when the wholesale price of gas is on the way down.
"To make matters worse, the ending of the universal monthly support payments at the same time, will mean there’s even less cash to go around."
Becca Lyon, head of child poverty at Save the Children UK, said: "The price cap announcement shouldn't detract from the reality: family budgets are already pushed to the absolute brink. High energy bills paired with rising costs - including very expensive childcare - means life is just as tough for families as it was last year, if not tougher.
“After a brutal winter, the Chancellor can choose to ease pressure on households in the Budget next month by significantly boosting child-related benefits, extending free school meals to children who need them, and taking action on sky-high childcare costs.”
What's the difference between the Ofgem price cap and Energy Price Guarantee?
The Ofgem price cap and Energy Price Guarantee both limit what you pay for each unit of gas and electricity you use, plus the maximum daily standing charge.
It applies if you're on a standard variable rate (SVR) tariff, which most people are now on due to a lack of cheaper fixed rate deals.
But crucially, there isn’t a total amount on how much energy you pay - the headline figures are used to illustrate what someone with typical usage can expect to pay over a year.
You can end up paying more or less, depending on how much energy you use.
For example, if you live in a well-insulated one-bedroom apartment, your bill will likely be much less than the headline figures - but you could end up paying more if you’re in an old, draughty house.
How you pay for your energy also has an impact on what you’ll pay.
The price cap for those on prepayment meters from April will be £3,325, down from £4,358, and it will be £3,482, down from £4,533, for people who pay on receipt of bill.
The Energy Price Guarantee was brought in last October to effectively replace the Ofgem price cap due to record high energy prices.
It sees the Government subsidise energy bills based against the difference between the Energy Price Guarantee and the Ofgem price cap.
At its current level of £2,500, and the price cap being at £4,279, this saves the average energy customer around £1,779 per year.
But with the price cap falling to £3,280, and the Energy Price Guarantee rising to £3,000 from April, the amount being covered by the Government dramatically reduces.
The Energy Price Guarantee will last for one year, up until April 2024, and covers gas and electricity bills in England, Wales and Scotland.
Why has the Ofgem price cap fallen?
Wholesale prices have started to fall dramatically compared to last summer, with analysts predicting they could be falling faster than expected this year.
This has sparked calls from campaigners including Martin Lewis for the Government to axe its planned rise of the Energy Price Guarantee from April.
All eyes will be on Chancellor Jeremy Hunt on March 15, when he announces his Spring Budget, to see if any changes to the Energy Price Guarantee are announced.
Mr Hunt previously told the BBC he did not think the Government had the "headroom to make a major new initiative to help people".
When will energy prices fall?
Cornwall Insight said it expects the price cap to fall further, to £2,153 in July and then hit £2,161 from October.
This will be below the Energy Price Guarantee, so will feed through to lower bills for customers and reduce the Government's part of the bill to zero.
But even these bills are around double where the price cap had been before the energy crisis.
The Ofgem price cap stood at £1,277 in October 2021, before it rose to £1,971 in April 2022.
