Energy price cap rises to £3,549 – industry reaction

Ofgem has announced the energy price cap will increase to £3,549 per year for dual fuel for an average household from 1st October 2022.

The increase is up 80% from the current cap of £1,971, and up 178% from the £1,277 cap in March this year.

The price cap increase comes as Ofgem’s CEO warns of the hardship energy prices will cause this winter and urges the incoming Prime Minister and new cabinet to provide an additional and urgent response to continued surging energy prices.

Ofgem says that the increase reflects the continued rise in global wholesale gas prices, which began to surge as the world unlocked from the Covid pandemic and have been driven still higher to record levels by Russia slowly switching off gas supplies to Europe.

The price cap, as set out in law, puts a maximum per unit price on energy that reflects what it costs to buy energy on the wholesale market and supply it to our homes. It also sets a strict and modest profit rate that suppliers can make from domestic energy sales. However, unlike energy producers and extractors, most domestic suppliers are currently not making a profit.

The price cap protects against the so-called ‘loyalty premium’ where customers who do not move suppliers or switch to better deals can end up paying far more than others. Ultimately, the price cap cannot be set below the true cost of buying and supplying energy to our homes and so the rising costs of energy are reflected in it.

Although Ofgem is not giving price cap projections for January because the market remains too volatile, the market for gas in Winter means that prices could get significantly worse through 2023.

Jonathan Brearley, CEO of Ofgem, said “We know the massive impact this price cap increase will have on households across Britain and the difficult decisions consumers will now have to make. I talk to customers regularly and I know that today’s news will be very worrying for many.”

“The price of energy has reached record levels driven by an aggressive economic act by the Russian state. They have slowly and deliberately turned off the gas supplies to Europe causing harm to our households, businesses and wider economy. Ofgem has no choice but to reflect these cost increases in the price cap.”

“The Government support package is delivering help right now, but it’s clear the new Prime Minister will need to act further to tackle the impact of the price rises that are coming in October and next year. We are working with ministers, consumer groups and industry on a set of options for the incoming Prime Minister that will require urgent action. The response will need to match the scale of the crisis we have before us. With the right support in place and with regulator, government, industry and consumers working together, we can find a way through this.”

Ofgem says that it will continue to work with the government, consumers groups, charities and suppliers, in supporting any new package of help or measures to ease the crisis.

The energy regulator has also strengthened the rules around direct debits to ensure suppliers set them at the right level, meaning that customers only pay exactly what they need to. The changes will stop suppliers from building up excessive customer credit balances and using them in a risky way as working capital.

Reacting to the news  Phil Andrew, CEO of StepChange Debt Charity said “Energy companies are now the top referrers of clients into our charity, and the proportion of new clients with energy arrears has doubled since 2019. In July, a third of our new clients were in energy arrears – in summer, even before the October price rise takes effect, let alone the even higher price cap announced today. Unless more support is forthcoming, the proportion of clients with a negative budget could rise from around a quarter now, to over half once the January price cap takes effect.”

“Household budgets are being pushed to the absolute limit and it’s inevitable this will lead to more people experiencing debt. The demand for debt advice is rising across the sector as the cost of living crisis bites. Many of our existing clients are also having to amend their arrangements as they can no longer afford their previous payments.”

“The Government is going to need to step in with more support for those who simply can’t cope financially due to these enormous price hikes. The question is how best to target and deliver relief to those who need it – we continue to favour an early uprating of benefits, and additional ambitious support to meet the scale of the crisis that many households will face.”

Joanna Elson CBE, Chief Executive of the Money Advice Trust said “Millions of households are facing a no-win scenario – and as the price cap continues to rise, the need for further support is becoming ever more urgent. The Government needs to come up with solutions for the many people for whom this situation is simply unaffordable.  This could include significantly raising benefits and introducing direct additional support to households on the lowest incomes.”

“Ofgem also needs to do more to protect households by ensuring suppliers treat people who are struggling or already in energy arrears fairly and halting potentially harmful debt collection practices.”

“This energy crisis is proving catastrophic for small businesses too. The Government needs to explore every option available to help small businesses cope with soaring energy costs – or risk many thousands failing to get through the winter.”

Alastair Douglas, CEO of TotallyMoney, said “The energy price cap was meant to protect consumers from being charged extortionate amounts for their bills. However, today’s hike makes clear that the price cap mechanism is no longer fit for purpose. We now have in black and white the challenges millions across the country are going to face this winter as they try to make ends meet.”

“Households are facing an unprecedented cost-of-living crisis that is completely out of their control and we need solutions to help people prepare for the worst. Past approaches are already proving ineffective, and upon their entry to Downing Street, both Liz Truss and Rishi Sunak need to act immediately, demonstrating to the public that they have measures which will be able to prevent the financial avalanche from swallowing consumers’ hard earned money.”

“With the price cap set to remain high into next year, it’s a matter of urgency that people are given support now.”

Helene Barnes, cost of living expert at Comparethemarket, said “Today’s increase in the energy price cap from £1,971 to £3,549, based on average usage, follows the £693 increase that came into effect in April, further increasing living costs for those already feeling the pinch. This comes at a time where nearly half (46%) of households with children at home are already struggling to pay bills.”

“During these difficult times, it is important people actively manage all aspects of their finances and look for savings wherever possible. It might be possible to cut back on things such as monthly subscriptions or certain bills, such as motor and home insurance.”

‘’Comparing policies online is one of the best ways to check you are getting value for money. By comparing, motorists could save up to £324 on average by switching from their existing insurance provider, and for those with home insurance there could be savings of up to £148 by switching their buildings and contents insurance.”

‘’The Government’s £400 grant this October will also help all households combat soaring energy prices, with a higher £650 payment available to provide specific support for households on the lowest levels of income.”

Richard Neudegg, director of regulation at Uswitch.com, said “Here is the signal that the summer holidays are over. After seemingly endless predictions, the true magnitude of the October energy price cap is now clear.”

“Ofgem has rubber-stamped the letters from suppliers that will now start landing on millions of doorsteps informing customers of exactly how much they’ll need to pay for their energy as we go into winter.”

“Households will face average monthly charges of £362 based on expected usage[1] – almost three times more than the same period in 2021.”

“Even after the £66 monthly discount currently on the table from the Government, families will need to find on average an extra £169 per month compared to last year, when many household budgets are already maxed out.”

“The energy crisis we face this winter must never be allowed to happen again. This is a failure of the wholesale market and, until that is resolved, we won’t have a long-term solution.”

“The Government has made it clear that it will not intervene further until a new Prime Minister is confirmed. As concerning as this is, there does seem to be consensus that more support will be made available, but it remains to be seen if it will be enough.”

“Until the Government acts, which we expect will be in the coming weeks, consumers are being held in a cost-of-living limbo.”

Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown said “We knew today’s announcement was going to be painful, but it’s still a shock to the system. When this kicks in in October, millions of people will struggle to pay the bills.”

“The first of the universal cost of living payments will kick in from October, but the scale of the rise means a £400 boost is a drop in the ocean. It means it’s worth checking whether you could be entitled to any other help from your provider, the government or your council.”

“Given the scale of the price rises, if there’s nothing more forthcoming from the government, these schemes will be completely overwhelmed, and millions of people will fall behind on their bills. It means the new Prime Minister is highly likely be forced to take action in order to help. We can only hope this will be announced sooner rather than later and put an end to the months of worry inflicted on people who have been wrestling with energy prices at their current levels – let alone with the rise.”

“Elsewhere around the world governments have responded with lump sum payments, harsher price caps and subsidies. In the UK suggestions have ranged from cancelling taxes and levies on bills to freezing prices for longer and lending money to energy companies to spread the extra cost. However, we will have to wait to see whether any of them get off the ground – and whether they do so to in time to ease the pain in October.”