Household face paying an estimated £3,549 per year from October for average use of gas and electricity - equating to a devastating 80 per cent rise in energy bills in a move that will deepen the soaring cost of living crisis even further for millions of people.
But what economic factors lie behind the energy price cap rise announced today by regulator Ofgem, and why is it happening? The energy price cap is a backstop protection from the government, calculated by Ofgem, and applies if a household is on a default energy tariff, whether bills are paid by direct debit, standard credit or by a pre-payment meter.
The price cap limits the rates a supplier can charge for their default tariffs, including the standing charge and price for each kWh of electricity and gas - the units a bill is calculated from. It updates and tracks wholesale energy and other costs, stopping energy companies from making excessive profits and ensuring customers pay no more than a fair price for their energy.
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But Ofgem said the rises are a result of record increases in global gas prices, with the war in Ukraine leading to a huge reduction in supply of gas from Russia.
It said the increase reflected the continued rise in global wholesale gas prices, which began to surge as the world unlocked from the Covid pandemic. Prices, added Ofgem, have been driven still higher to record levels by Russia slowly switching off gas supplies to Europe.
The cap will come into effect for around 24 million households in England, Scotland and Wales on default energy tariffs on October 1, and will remain in place until December 31, when it will be adjusted again.
The 4.5 million pre-payment meter customers meanwhile, who are often the most vulnerable and already in fuel poverty, will see an even more punishing increase, with their average annual bill set to go up to £3,608.
And based on Wednesday's gas prices, experts at consultancy Auxilione said they think the cap will reach £5,210 in January 2023 - and a staggering £6,823 in April.
As Europe severs ties with Russia, the UK is going to become increasingly reliant on liquified natural gas (LNG), which is transported around the world on ships, said Nathan Piper, an oil and gas analyst at Investec, as he revealed reasons behind the price cap rise. This is naturally more expensive than gas piped across continents, and will mean prices stay well above the historical average.
In the 10 years before the current gas crisis, prices averaged around 50p per therm, a popular unit of measurement. Now it stands closer to £6, a 12-fold increase. Data from the Intercontinental Exchange shows that gas prices for the winter of 2024 and 2025 is trading at nearly 420p.
"For the UK, in particular, we are going to be more and more reliant upon LNG imports to satisfy our gas demand. And as a consequence, we will have to get used to higher gas prices into the long term," Mr Piper said. "I think we have to accept that we’ll have to endure much higher gas prices than we've been to. And the era of cheap energy is over."
Prices were already rising before Russia invaded Ukraine, but since then the situation has worsened. Problems in France’s nuclear plants have also pushed up the price of electricity, a hot dry summer has reduced power production from Norway’s rivers, and low water levels on the Rhine have made it harder to transport coal in Germany, Mr Piper added.
Chancellor Nadhim Zahawi said the increase in the energy price cap would cause 'stress and anxiety' for people, but that the Government was working to develop more options to support households, saying 'help was coming' with £400 off bills for all, the second instalment of a £650 payment for vulnerable households, and £300 for all pensioners.
He accused Russia of driving up energy prices in revenge for the UK's 'support of Ukraine's brave struggle for freedom'.
The number of UK households in fuel poverty, meanmwhile, will have doubled in a year when the price cap rise takes effect, according to the charity National Energy Action (NEA)
It calculates that 8.9 million UK households will be in fuel poverty from October – up from 4.5 million last October. This takes into account the Government’s support package announced in May.
The trade body for energy suppliers in the UK has said the charges its members will be forced to pass onto households will be “simply unaffordable”, after Ofgem hiked the price cap by 80% from October.
"This rise, while widely predicted, will be hugely worrying to customers. We know many customers are already struggling with energy bills and other costs and for millions of households, these latest increases will be simply unaffordable,” Energy UK’s director of regulation Dan Alchin said.
"The rise is driven by the cost of buying gas on the wholesale market, which has been at record levels for about a year now – with prices this week 10 times what they were before the crisis.
"These costs are out of the control of energy retail suppliers who need to recoup them, otherwise we risk more going out of business in addition to the 30 that have done so since last August – causing huge cost and disruption to customers."
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