Ofgem raises energy price cap
Energy regulator Ofgem has announced the energy price cap will increase to £3,549 per year for dual fuel for an average household from 1 October 2022.
Ofgem CEO Jonathan Brearley has warned of the hardship energy prices will cause this winter and urged the incoming Prime Minister and new cabinet to provide an additional and urgent response to continued surging energy prices.
The new price cap level is based on a transparent methodology and calculations by Ofgem. The data is published on the Default tariff cap level: 1 October 2022 to 31 December 2022 publication.
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.”
A Government Spokesperson said: “We know people are incredibly worried about rising energy bills, following unprecedented gas prices across the continent driven by global events, including Putin’s aggression in Ukraine and his weaponisation of energy in Europe.
“Direct support will continue to reach people’s pockets in the weeks and months ahead, targeted at those who need it most like low-incomes households, pensioners and those with disabilities. As part of our £37 billion package of help for households, one in four of all UK households will see £1,200 extra support, provided in instalments across the year, and everyone will receive a £400 discount on their energy bills over winter.
“The civil service is also making the appropriate preparations in order to ensure that any additional support or commitments on cost of living can be delivered as quickly as possible when the new Prime Minister is in place.”
Chancellor of the Exchequer, Nadhim Zahawi said: “I know the energy price cap announcement this morning will cause stress and anxiety for many people, but help is coming with £400 off energy bills for all, the second instalment of a £650 payment for vulnerable households, and £300 for all pensioners.
“While Putin is driving up energy prices in revenge for our support of Ukraine’s brave struggle for freedom, I am working flat out to develop options for further support. This will mean the incoming Prime Minister can hit the ground running and deliver support to those who need it most, as soon as possible.”
Further industry reaction:
Polly Billington, Chief Executive of UK100, the network of council leaders and mayors committed to Net Zero and clean air, said: “With households already beset by a cost-of-living crisis, it’s impossible to see how many families will cope with an average energy bill rise of over £1,500 a year. We are looking down the barrel of a bleak winter across Britain. It is clear that urgent action is needed to help communities now.
“But while cash handouts are a vital short-term measure to support the most vulnerable across the country, we cannot pretend that those funds are going anywhere but straight back to the energy firms already making record profits.”
“The handouts already budgeted for will cost taxpayers £21bn. How much will that bill increase when the cap rises again in January?”
Doubling down on earlier and repeated calls for a nationwide energy efficiency drive to bring down bills and accelerate Net Zero progress, Polly added: “With energy prices sky-high and only forecast to get higher, and millions facing fuel poverty, it is finally the time to grasp the energy efficiency nettle. The cheapest energy is the energy we don’t use, and we need a nationwide drive to improve the energy efficiency of our homes — a drive that will permanently slash energy bills.
“We need support for an emergency energy efficiency strategy that prioritises, first and most urgently, upgrading Britain’s social housing stock. Local and regional leaders are ready to deliver those improvements and reduce bills for their constituents. But they need backing from the central government.”
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