Energy price cap to rise again in Spring of 2022
Despite reports, including from ourselves, that Ofgem’s energy price cap was not expected to be increased in October, a new report by experts now suggests that the industry regulator will be forced to put up the maximum yearly rate for standard variable tariffs by another 14% by Spring of 2022. This is on top of next month’s £139 increase!
What is the energy price cap?
The energy price cap is a limit to the price that energy providers can charge you for gas and electricity if you’re on one of a few particular tariffs. It applies to standard variable or ‘default’ tariffs - which is a tariff you didn’t choose to be on, but are usually moved to after your term ends on a fixed deal.
There are also different energy price caps for other types of tariff, such as prepayment. The price caps for the period of April 1 to the end of September 2021 are listed in the table below:
|Tariff type||Ofgem price cap|
It’s important to note that the rates for fixed tariffs are not capped, and that certain renewable tariffs are also exempt from the energy price cap. For a full rundown of all the details around the price cap and how it works, head over to the Ofgem website, where a full guide is available.
Why might the energy price cap go up?
Reports in recent months have suggested that Ofgem is reluctant to increase the cap, but a report from consultancy Cornwall Insight has been released which suggests that skyrocketing wholesale prices will force the regulator to allow providers to charge more. Wholesale prices are currently at their highest rate since the UK was hit by the infamous ‘Beast from the East’ in late February and early March 2018.
A senior consultant at Cornwall Insight, Dr. Craig Lowrey, explains these increases:
Wholesale prices have been hit by a combination of factors. Underlying commodity prices have risen, so, too, have carbon prices reaching a high of €50 per tonne of carbon and more than doubling over the past year. On top of this, underlying gas prices have risen considerably due to a cold winter across Europe and low levels of gas in storage facilities.
These factors, it is estimated, will lead to an increase of 9.8% to the average customer’s annual energy bill if they’re on a standard variable tariff for dual fuel, with the estimate jumping from £1,138 to around £1,250.
On top of this increase for October 2021, it is now expected that further increases are to come in the Spring of 2022. As much as another 14% price hike. This brings the above average annual energy bill from £1,250 to approximately £1,425.
When you consider that just a year ago the energy price cap was set at £1,042, this represents a huge difference to customers. If you’ve been on one of the major providers’ standard variable tariffs and you use the average amount according to Ofgem, your bill will be more than £425 more expensive in the Spring of 2022.
You can, of course, save on your energy bills by switching to a provider offering a deal that’s below the energy price cap. There are plenty of options available to you, particularly if you’re willing to tie yourself down to a fixed tariff for a bit, and we always recommend shopping around extensively before you decide on deal.
Why are energy prices increasing so much in the UK?
There have been quite a few factors impacting the soar of energy prices. It has been a sort of ‘perfect storm’ brewing. Here are just a few factors that have caused energy prices to rise:
- There is a global shortage of gas, which has increased prices worldwide.
- There has been a higher demand for gas this past winter in Europe and Asia due to a longer and colder winter than usual. People forced into lockdown due to COVID-19 also increased their gas consumption.
- The higher usage has left gas storage sites close to empty. This is very unusual for this time of year.
- The production of gas has lowered due to the disturbance caused by the COVID-19.
- The UK relies heavily on natural gas, so much so that 42% of its electricity comes from burning this fuel.
Recent events compounding the problem further
In addition to global circumstances affecting the price of energy, the following local factors are compounding the energy price problem even more in the UK:
- A major fire on 16th September at the Kent national grid plant has forced the shut down of a power cable connecting France to the UK. This cut off 6% of the electricity usually imported to the UK overnight. The fire has caused so much damage that the cable may not operate again until March 2022!
- There is low production from UK windmill farms. Winds have been barely blowing in the last year, thus causing wind turbines to produce extremely low quantities of energy. These farms usually account for 20% of the UK’s electricity production.
When energy prices fluctuate, it usually impacts other aspects of our regular lives. This is because energy is used in just about everything we consume, from food to manufactured goods.
Therefore, it is likely that the pricing of other essential goods will also increase in the near future as a result of this ‘perfect storm’ surrounding the energy market.