Energy price cap rises to £3,549: What it means for your finances

The UK’s energy regulator, Ofgem, has increased the energy price cap by 80%, sending the average gas and electricity bill from £1,971 to £3,549 a year. 

This figure, which is marginally less than the £3,576 originally predicted, will come into effect from October 1 and will be almost treble what it was last October when it was £1,277. 

But with inflation at a 40-year high and the price of goods and services already through the roof, people are, understandably, worried about what this announcement means for their finances.

In this article, we’ll discuss the energy price cap rise and what it means for the pound in your pocket. 

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What is the energy price cap? 

The energy price cap was introduced at the start of 2019 to prevent energy companies from making excessive profits. 

It is, essentially, a limit on the amount of money energy companies can charge their customers per year and dictates the maximum daily standing charge (the price of having your home connected to the grid). 

In April this year, millions of families faced unprecedented price hikes when the energy price cap jumped by a record-breaking 54%, sending the average energy bill from £1,277 to £1,971. The current energy price cap of £3,549 is also expected to soar to over £5,387 in January 2023 and £6,616 by April 2023. 

Ofgem has, however, confirmed that the energy price cap could come into effect before October and is “not a cap on the maximum bill a household can be charged, which is based on their usage.” This means bigger households can, and will, be charged more than £3,549 if their usage exceeds the average customer. 

Why has it increased? 

The energy price cap has increased due to a combination of factors, including the reopening of economies in the wake of the COVID-19 pandemic and a global increase in wholesale gas and electricity prices which have reached an all-time high. 

Russia’s invasion of Ukraine has also led to a spike in gas and electricity prices because whilst the UK only receives around 3% of its gas from Russia, a drop in global supply has affected the international markets that impact the UK. 

With last year’s price increases forcing a number of energy companies out of business, the energy price cap has been increased in an attempt to protect the rest from collapsing due to the rising cost of fuel around the world.

What does it mean for your finances?

The energy price cap increase is expected to impact approximately 24 million people. This includes customers that have never entered into a fixed energy deal, customers that didn’t switch when their fixed energy deal ended, customers whose supplier went bust but they didn’t switch and customers that have recently moved home but haven’t switched. 

From October 1, the daily standing charge for electricity will increase from 45.3p to 46.3p whilst the unit rate per kWh (kilowatt per hour) will increase from 28.8p to 51.8p. Similarly, the daily standing charge for gas will increase from 27.2p to 28.4p and the unit rate per kWh will increase from 7.4p to 14.8p. This means that, even if you don’t use any energy whatsoever, your standing charge bill will still be £273 a year. 

The usual advice has always been to switch to energy providers on a regular basis to ensure you’re still getting the best deal but with the market still in such a volatile state, this could lead to a situation where wholesale energy prices drop whilst you’re locked into a fixed rate.

Is further help needed? 

With prices rising at the fastest rate in 40 years and millions more households expected to face fuel poverty, there is mounting pressure on both the government and energy companies to do something to ease the burden. 

In May, Rishi Sunak announced a package of financial support worth £21 billion following April’s 54% energy price cap increase with a £400 discount on energy bills to be paid to all UK households in England, Scotland and Wales from October. 

Scottish Power also submitted a £100 billion plan to the UK government to freeze customers’ energy bills at the current energy price cap for two years amidst the ongoing cost of living crisis. The scheme, which has reportedly been backed by Centrica and Octopus Energy, aims to build an emergency funding package over the next decade for families struggling with the rising cost of living. 

Finally, the Don’t Pay UK scheme has been gathering momentum since the announcement but with serious consequences for refusing to pay your energy bills, MoneySavingExpert.com founder Martin Lewis has urged homeowners to do their research before participating.