Households all across the UK have been warned to brace for a significant increase in their energy bills due to an increased energy price cap.
Energy regulator Ofgem has warned that bills may increase every three months soon, with customers facing a "very challenging winter". It comes after the wholesale price of energy continues to rise in part due to the Russian invasion of Ukraine.
While a small fraction of the UK's gas is sourced from Russia, it has not prevented the impact on prices across Europe which depends more on Russian gas. Here's everything you need to know about the energy price cap and how it will affect your bills in the coming months.
Read more: Energy bill price cap to be updated FOUR times a year as Ofgem warns of ‘challenging winter’
What is the energy price cap?
The energy price cap is enforced by Ofgem to set a limit on what energy providers can charge customers on both default and standard variable tariffs. Previously, variable tariffs were more expensive than fixed-rate deals with a lot of people staying on these tariffs if they never switched supplies, had their fixed-term end or their supplier had gone out of business.
It is believed that around 23 million households in the UK have their domestic energy bill decided by Ofgem's price cap. A price cap is also decided for customers on prepayment meters which are separated from those with variable tariffs.
For standard energy bills, the price cap is controlled by the maximum standing charge and price per kWh of gas and electricity that your supplier can charge you.
How will it change?
Initially, the price cap that was introduced by Ofgem in 2019 only changed twice a year - once in April for the summer period and once in October. Now, Ofgem will update the price cap quarterly because the market has been moving so erratically with Ofgem chief executive Jonathan Brearley warning that prices in May could soar "to the region £2,800" and indicates "how dramatically the market is changing".
How does Ofgem calculate the price cap?
Ofgem calculates the price cap by examining how much the average energy supplier would spend providing energy for an average home. Other factors are also included such as usage levels and market data across any given period.
Other considerations when it comes to determining the energy price cap include the operating costs and profit margin of suppliers as well as environmental obligations and taxes.
Why are my bills increasing and what can I do?
Due to the soaring cost of gas - which has soared around six-fold since the beginning of the Ukrainian invasion - customers have had to face higher bills due to calculated supply and demand. If you're concerned about being able to afford your energy bill, Ofgem recommends contacting your energy supplier as soon as possible.
Under official Ofgem rules, suppliers must work towards coming to an agreement with customers to establish a payment plan they can afford. Some suppliers also offer specific schemes to reward more energy-efficient homes as well as free boiler checks and upgrades.
The government is also providing extra support this winter with Winter Fuel Payments or the Warm Home Discount scheme while some charities may be able to provide a grant. However, Ofgem warns customers to not join the "Don't Pay" group which asks customers to add their names to a list in a pledge to cancel their direct debits for gas and electricity from October 1 in protest against soaring costs.
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