Ofgem has confirmed that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”. The regulator said the change would go “some way to provide the stability needed in the energy market”.
It said Russia’s actions in Ukraine had led to volatility in the global energy market experienced last winter lasting “much longer, with much higher prices for both gas and electricity than ever before”. As previously predicted by industry experts, Ofgem warned that as a result of the market conditions, the price cap would have to increase later this month to reflect increased costs.
However it said that the changes would mean that any fall in wholesale prices would be passed on in full to customers and more quickly with the quarterly price cap.
Ofgem chief executive Jonathan Brearley said: “I know this situation is deeply worrying for many people. As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably.
“The trade-offs we need to make on behalf of consumers are extremely difficult and there are simply no easy answers right now. Today’s changes ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also, that it can adapt to the current volatile market.
“We will keep working closely with the UK Government, consumer groups and with energy companies on what further support can be provided to help with these higher prices.”
Mr Brearley later confirmed to BBC Radio 4’s Today programme that Ofgem was looking at taking money off standing charges, but warned that trade-offs were involved and “there aren’t easy answers in the market right now”.
Referring to his prediction in May that Ofgem was expecting an energy price cap in October “in the region of £2,800”, he said: “I would say that it’s very clear that we expect significant increases again in prices, even over and above the estimate that we made in May. And that just shows you how dramatically the market is changing.”
Asked about proposals to help customers, such as cutting VAT and green levies, he replied: “There is an almost £40 billion package of measures that are already in place to pay as discounts on our bills, but I think everyone recognises that the market has fundamentally changed since that package was announced, which was only two months ago, so every politician will be thinking about how they can mitigate that.”
He added: “I think we all recognise that more will need to be done.”
Business, Energy and Industrial Strategy Committee chairman Darren Jones said: “Whilst the change announced by Ofgem today will prevent more energy suppliers going bust, and the cost of failures being added to our bills, it also means customers will see their bills going up more frequently than before. These increases won’t be as big as before but they’ll be increases nonetheless.
“When the price of energy starts to come down, customers will see their energy bills reduce more quickly, but I don’t expect to see this happening until the end of 2024 or 2025.
“That’s why my Committee has asked the Government to look at introducing a social tariff, as a more effective method of price regulation to help low income households.”
Changes to the price cap come as household energy bills are likely to remain at more than two-and-a-half times their pre-crisis levels until at least 2024, according to latest predictions.
Cornwall Insight, one of the country’s most respected energy consultancies, said bills will hit a staggering £3,359 per year from October for the average household, and not fall below that level until at least the end of next year.
The price cap on energy bills, which regulates what 24 million British households pay, will hit £3,616 from January and rise further to £3,729 from April, it said.
It will begin to fall after that, but only slowly, reaching £3,569 from July before hitting £3,470 for the last three months of 2023.
The latest predictions are hundreds of pounds above previous forecasts from Cornwall Insight, but are slightly lower than what another consultancy, BFY, has predicted.
In May, the UK Government announced an energy costs support package worth £400 per household in response to predictions that bills would rise to £2,800 for the average household in October.
The package also promised extra support for more vulnerable households.
Last month, Cornwall Insight predicted that annual energy bills would typically rise to £3,244 from October and £3,363 from January, but circumstances have changed significantly since then.
While the UK gets very little of its gas directly from Russia, the price paid here is determined by what happens across the Continent.
If the predictions come to pass they will put enormous pressure on already squeezed households.
It would be a near-doubling of today’s record price cap which at £1,971 is already hundreds of pounds more than the previous high.
Although it is still early days for the January prediction, analysts already have most of the data they need to accurately forecast October’s rise.
National Energy Action director of policy and advocacy Peter Smith said: “Ofgem moving ahead now with passing price cap changes on to households quarterly rather than every six months wasn’t necessary and unfortunately means further significant price increases in January are inevitable.
“Average annual bills are already predicted to increase by £1,200 a year – a 177% increase since last October. Now, householders can expect further hikes just after Christmas, in the middle of heating season when energy costs are typically at their highest.
“January is also usually a time of increased mental health problems and further hikes in bills will sadly lead to increased misery and huge anxiety for energy consumers across Great Britain, particularly for the poorest households. It’s disappointing that Ofgem has not listened to these concerns. They could have used their discretion to offset this avoidable outcome by starting the reforms in April when energy demand starts to fall.
Inflation set to hit 13.3%
The Bank of England has warned that the UK is set to fall into its longest recession since the financial crisis and inflation will peak at more than 13% as gas prices soar.
Decision makers hiked the Bank’s base interest rate to 1.75% from 1.25%, the biggest single rise since 1995, as they tried to control the runaway inflation.
Consumer Prices Index inflation will hit 13.3% in October, the highest for more than 42 years, if regulator Ofgem hikes the price cap on energy bills to around £3,450, the Bank’s forecasters said.
The energy price will push the economy into a five-quarter recession - with gross domestic product (GDP) shrinking each quarter in 2023.
The dire economic conditions will see real household incomes drop for two years in a row, the first time this has happened since records began in the 1960s.
Unemployment will also start to rise again next year, according to the projections.
The Bank said that it expects inflation to come back under control in 2023, dropping below 2% towards the end of the year.
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