Energy price cap set to rise: Here’s what it means for your finances
While the price cap will be lower than what it was at the beginning of this year, Britons are being warned this winter’s energy bills are “likely” to be the highest they’ve ever been.
Richard Neudegg, director of regulation at Uswitch.com, said: “This rate increase will bite during the coldest period of the year when households need to use the most energy. The price cap will go up by five percent from January due to the increases in the wholesale energy market.
“This means energy bills are likely to be the highest they’ve ever been for most homes this winter. Between January and March, average bills will be £46 more expensive than the same period last year when the Government’s Energy Bill Support Scheme was in place.”
With many wondering how exactly the price cap rise might affect their bills and its implications for their future finances, here’s everything you need to know.
Energy bills will rise for millions of households in January 2024
What is the energy price cap?
The energy price cap was introduced in 2019 by the regulator Ofgem to prevent service providers from making excessive profits from customers.
Essentially, the cap is in place to stop energy suppliers from charging any prices they like per kWh of energy used, while also taking into account real wholesale energy prices.
This prevents suppliers from purchasing energy at a higher price than what they are selling and is meant to ensure a “fair” price for all. The price cap is set for England, Wales and Scotland for each unit of gas and electricity. Energy in Northern Ireland is regulated separately.
The energy regulator reviews the price cap every three months to set a level on how much providers can charge for each unit of energy. However, the frequency of such has drawn widespread criticism over the past two years due to price volatility.
The energy price cap is reviewed and updated every three months
How much will energy bills rise?
Following today’s announcement, the energy price cap will increase by five percent on January 1.
Per unit rate, the price for a typical user paying by direct debit will rise from 27.35p per kWh to 29p per kWh for electricity on January 1, 2024.
For gas, the price will rise to 7p per kWh. The average daily standing charge will remain unchanged at 53p per day for electricity and 30p per day for gas.
This will take the annual price for a typical duel-fuel household up from £1,834 to an average of £1,928.
The headline price cap figure is an average across households rather than an absolute cap on bills, so those who use more will pay more.
Why are energy bills going up?
Ofgem said the increase of £94 over the course of a year – around £7.83 a month – was driven almost entirely by rising costs in the international wholesale energy market due to market instability and global events, particularly the conflict in Ukraine.
Commenting on the rise, Jonathan Brearley, chief executive at Ofgem said: “This is a difficult time for many people and any increase in bills will be worrying. But this rise – around the levels we saw in August – is a result of the wholesale cost of gas and electricity rising, which needs to be reflected in the price that we all pay.
“It is important that customers are supported and we have made clear to suppliers that we expect them to identify and offer help to those who are struggling with bills.
“We are also seeing the return of choice to the market, which is a positive sign, and customers could benefit from shopping around with a range of tariffs now available offering the security of a fixed rate or a more flexible deal that tracks below the price cap.
“People should weigh up all the information, seek independent advice from trusted sources and consider what is most important for them, whether that’s the lowest price or the security of a fixed deal.”
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What are the cheapest energy tariffs?
Speaking on Good Morning Britain earlier, Money Saving Expert founder Martin Lewis said: “I have checked this morning. There is one deal that I would suggest people switch to. That is for existing customers of E.ON Next. It has a tariff that locks in at three percent under the price cap for the next year. So, you’ll pay less than the price cap.
“If you are an E.ON Next customer, I would suggest that you switch to that because that is a good deal compared to what you are paying.
For those who aren’t E.ON Next customers, Mr Lewis said: “You could switch to E.ON Next’s standard rate and then switch again to this rate, assuming it’s still there by the time you move.”
As for cheap fixes on the market, Mr Lewis said: “There are no cheap fixes available that I would consider that do not involve you having to switch all of your other utility bills as well right now.
“The cheapest fix out there, across the market, is four percent more than the current price cap and on my numbers based on the current predictions, you wouldn’t want to be locking in on more than one percent than the current price cap.”
When will the next energy price cap announcement be made?
The energy price cap is reviewed and updated every three months. After January, the dates when the levels will be announced over the next year are:
- April 1 to June 31, 2024 level, announced by February 23, 2024
- July 1 to September 31, 2024 level, announced by May 28, 2024
- October 1 to December 31, 2024 level, announced by August 27 2024.
How to reduce energy bills
There are a number of ways people can keep energy costs lower in the home. Jon Bonnar, managing director at Cotswold Energy said: “There are plenty of effective ways to shrink your energy bills whilst keeping your home warm, ranging from major home improvements for long-term savings to quick fixes that you can make right now.”
According to Mr Bonnar, the most “impactful way” to cut energy bills in the long term involves investment in renewable energy solutions along with better insulation. However, he noted there are ways to slash bills with minor improvements too.
Mr Bonnar said: “Install a smart thermostat. Smart thermostats allow you to control your heating whilst you’re away from home, but one of the overlooked benefits is the ability to individually control separate radiators or rooms.
“If you work from home in a particular room, for example, this can produce some major cost savings. You could heat the room you’re working in alone, rather than the entire house. This could significantly reduce your energy usage, whilst still keeping you warm and toasty while you’re working through the winter.”
Secondly, the energy expert suggested switching to energy-efficient LED bulbs. He explained: “Switching out traditional bulbs to LED bulbs means you’ll use up to 80 percent less energy on your light sources. This can significantly lower your electricity bills, especially in rooms where you use lights extensively.
“You may think that energy-efficient bulbs will be duller or less bright, but this isn’t the case – it’s the opposite! LED bulbs typically offer a brighter light for the same wattage.”
Another simple cost saving solution is to draught-proof the home. Mr Bonnar said: “Draughts let in too much cold air and waste too much heat. They’re most likely to appear around doors, windows, chimneys, fireplaces, floorboards, skirting boards, loft hatches and cracks in your walls.
“Thankfully, simple draught-proofing measures can be an affordable way to instantly reduce your energy bills. The simplest measure is often a draught excluder – these are available for floors, letterboxes and chimneys – but you could also consider installing door brush strips and keyhole covers and using silicone filler or expanding polyurethane foam to fill in gaps.
“Once you’ve eliminated major draughts, you might find that you feel comfortable turning your thermostat a little lower. This is extremely beneficial, as even a single degree reduction in a typical home could rack up to £145 savings a year, according to Which.”
People can read more energy bill savings tips here.