What is the energy price cap and why are gas and electric bills rising by record amounts in October and January?
Household energy bills could hit £500 a month by the new year – according to the latest gloomy predictions about the UK's escalating cost of living crisis.
The warning, which one fuel poverty charity has described as striking 'terror into the hearts of millions of people', is connected to increases to the energy price cap.
Gas and electric bills have already suffered one significant cost rise this year, leaping by between £600 and £700 in April for the average household on a standard variable tariff.
A second rise of more than £800 is now forecast for October followed by the potential for another swift leap in January – changes that could leave millions of homes facing fuel poverty and struggling to heat their homes by the winter.
But why are energy bills facing such rapid increases and what help is there available?
What is the energy price cap?
The energy price cap was introduced at the start of 2019 by regulator Ofgem, with the aim of preventing households on traditionally more expensive standard tariffs from being over charged for the energy they were using.
The thresholds, overseen and set by Ofgem, control the amount suppliers can charge customers for their energy by placing a maximum limit on gas and electric charges. It applies to people either on a default standard variable energy tariff or those using pre-pay metres, which is estimated to be around three fifths of all households combined.
The price cap is currently assessed twice each year – initially in April and again in October – which can lead to bills coming up or down depending on wholesale prices and how markets are performing.
However there are now plans to shorten the time between each revision of the price cap to three months instead of every six, which if it goes ahead will see those thresholds change in October and then again this coming January.
Why are bills rising?
Because of rising wholesale energy costs, more recently fuelled by the war in Ukraine, and to help providers cope with missed customer payments caused by the pandemic, Ofgem allowed the price cap in April to rise by around 54 per cent.
This pushed the average cost of an annual bill up by roughly £693 a year for the average sized household – the highest price rise in about 10 years. It took yearly bills for those standard households paying by direct debit to £1,971 up from £1,277.
Some 23 million households are currently estimated to have their bills controlled by the price cap.
But energy markets remain volatile. Russia's invasion of Ukraine continues, placing greater uncertainty on markets, while wholesale gas prices continue to rise, remain unpredictable and at times have been 10 times their normal level.
This has prompted Ofgem to warn people that bills will have to rise again in October, when it looks at charges for the second time this year while forecasts now warn of another astronomical leap in January (should three-monthly assessment periods be brought in instead).
That could see the average bill for the average sized household potentially rise close to £500 a month – with those using less paying less and those using more paying more – a situation consumer champion Martin Lewis has described as 'desperate'.
How much might bills be in October and January?
Ofgem initially said it expected the price cap to increase to something in the region of £2,800 by October – but updated autumn predictions from Cornwall Insight suggest the October price cap could now rise by 78 per cent, making a typical bill £3,500 a year.
For average-sized households, with average-sized gas and electric bills paying by direct debit, this could mean an extra £1,000 being added to yearly bills and would leave homes needing to find potentially another £100 a month more than they're paying now for the additional charges.
Should Ofgem press ahead with plans to reassess the energy price cap every three months, instead of six, from 2023 it will mean another change to bills in January.
Cornwall Insight has not yet released its predictions for a January price cap rise however grim forecasting from BFY Group, a utilities consultancy, says it expects the cap on bills to reach £3,850 between January and April next year – hundreds of pounds more than prior predictions.
"Following further rises in wholesale prices as flows of gas from Russia to Europe via the Nord Stream 1 pipeline drop to 20 per cent of capacity, we now forecast the Ofgem price cap to rise to £3,420 in the fourth quarter of 2022 and £3,850 in the first quarter of 2023,” Dr Gemma Berwick, a senior consultant at BFY Group said.
The increases expected in October and January won't affect those who at either of those times are locked into a fixed-rate tariff, where the price they are paying for energy is fixed for a certain number of months or years. But since April's price cap rise fewer good fixed-rate deals have been available to customers, meaning that more and more people by the end of this year will find themselves on their supplier's variable rate and so open to the winter price changes.
Ofgem chief executive Jonathan Brearley has described the current situation as a 'once in a generation event' perhaps has not been seen since the oil crisis of the 1970s. But charities say that will provide little comfort to people struggling to manage constantly rising outgoings.
What help is available?
The Government has so far brought forward three new policies, on top of existing grants and Warm Home help, to try and help people manage their escalating gas and electric bills and ease the pressure on outgoings.
In April district, borough and city councils began giving households in council tax bands A to D a £150 council tax rebate, following an instruction by Downing Street. The lump sum does not need to be paid back.
Then Chancellor Rishi Sunak said he hoped this would help the majority of people cover some of April's price cap rise – albeit many charities said the £150 people were being given would not touch the sides of an increase that is now totalling close to £1,000 annually for most homes, combined with more rises on the horizon.
Since then further help has arrived for those on means-tested benefits in the form of a £650 cost of living payment.
This is being paid out in two instalments – the first payment of £326 is arriving into people's bank accounts this month with the second payment set to follow in the autumn. Again, none of this money had to be paid back, but with bills rising at a considerable rate poverty charity Turn2Us has predicted that most households receiving it will be fortunate to make it last more than five weeks and won't get to October's price rise with it still in their accounts.
And finally, later this year every household will be given a £400 credit on their energy bills.
Initially planned to be a £200 rebate – or loan – that would have eventually needed to have been paid back, these plans have now been scrapped in favour of a £400 lump sum households can keep.
All households in England, Scotland and Wales will receive the £400 help to offset the soaring increase in energy bills from October. It doesn't require an application form with debit customers expected to have the money credited to their account while customers with pre-payment meters will most likely get the money in the form of a voucher they can use.
Is any more help coming?
Price cap predictions that suggest average energy bills could edge close to £4,000 by early next year will no doubt put the Government under considerably more pressure. But with a Conservative leadership race now in full swing we might have to wait until the end of the summer when the country has its next PM in place before any further firm policies are unveiled.
Charities are warning that millions more homes will be placed into fuel stress this winter if more isn't done to try and bring down the cost of people's bills.
Fuel stress is defined as spending at least a tenth of a household's budget solely on energy bills, and if October's bill increase plays out as predicted the numbers facing fuel stress could rise from five million families to nearer 10 million, warn campaigners and opposition ministers.
Consumer champion Martin Lewis is among those demanding that leadership candidates Liz Truss and Rishi Sunak meet with Boris Johnson to come up with an action plan that addresses the worsening price cap predictions.