Energy prices to rise for millions as Ofgem increases cap

More than half of British households are set to see an increase in the cost of energy in April after the regulator, Ofgem, raised price caps.

Ofgem sets maximum prices that can be charged for gas and electricity to those who have not switched suppliers and are on default tariffs.

The new cap could see these households typically pay an extra £117 a year.

The regulator is allowing suppliers to cover the higher costs they face on the wholesale market.

“We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering,” said Dermot Nolan, chief executive of Ofgem.

About 11 million households are on default, or standard variable tariffs, and are set to be affected. Such a household, which uses a typical amount of energy and pays the bill by direct debit, should now expect to pay £1,254 a year.

Consumer groups say they can shop around for a better deal.

Another four million people are on prepayment meters, so pay for their energy in advance. The price cap will rise on their tariffs too, with the typical customer paying £1,242 per year, up by £106 from the previous cap level.

How do these caps work?

Energy price capping is a flagship government policy designed to protect the vulnerable and those who have stayed loyal to their energy supplier.

Ofgem sets the cap for households in England, Wales and Scotland. Northern Ireland has a separate energy regulator and its own price cap.

Ofgem sets a cap on the unit price of energy for electricity and gas, and a maximum standing charge.

Energy companies are not allowed to charge default tariffs that are higher than these thresholds.

The first cap came into force at the start of January. Ofgem said this price limit meant households typically saved £76 a year on what they would have been charged without the cap.

Ofgem has now reviewed the cap and will allow suppliers to charge more from April.

The cap for those on prepayment meters came into force earlier but has also been reviewed and revised up.

Why are prices rising?

Prices are rising because Ofgem is allowing suppliers to charge more to cover the higher wholesale costs they face owing to the higher global price of oil. Wholesale costs account for more than a third of a typical energy bill.

The regulator considered the costs faced by suppliers in the six months to the end of January when setting the new cap for April.

Operating costs and profits are also part of a complex set of allowances considered when setting the cap.

Does that automatically make my bill higher?

The cap is per unit of energy, not on the total bill.

So people who use more energy will still pay more than those who use less.

The new cap takes effect in April, after the worst of the winter has gone, so the impact of higher prices might not be as great as it could have been.

Ofgem points out that, without the existence of the cap, households would have been paying more.

Its analysis suggests that default tariff customers could be paying around £75 to £100 a year more on average for their energy had the default tariff cap not been introduced, despite the increase just announced.

People can also shop around for a cheaper fixed deal. This would make the cap irrelevant for them.

Ofgem and consumer groups say switching could save a typical household £200 a year, although this differential has narrowed from about £300, partly as a result of the cap.

The level of the cap is updated every six months, at the start of April and the start of October, this year and next year, and possibly beyond.

Forecasts are already suggested that the cap could be lowered next time, saving households money from October.