Record gas prices drive up price cap by £139, says Ofgem

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The energy price cap will increase from 1 October, Ofgem has announced.

Those on default tariffs paying by direct debit are set to see an increase of £139 from £1,138 to £1277, while prepayment customers will see an increase of £153 from £1,156 to £1309.

This increase is reported to be driven by a rise of over 50% in energy costs over the last six months with gas prices hitting a record high as the world emerges from lockdown.

Jonathan Brearley, chief executive of Ofgem, commented on the announcement: “Higher energy bills are never welcome and the timing and size of this increase will be particularly difficult for many families still struggling with the impact of the pandemic.

“The price cap means suppliers only pass on legitimate costs of supplying energy and cannot charge more than the level of the price cap, although they can charge less.

“If you’re struggling to pay your bill you can get in touch with your supplier to access the help that’s available and if possible, shop around for a better deal.

“We have put tough rules in place to ensure suppliers treat customers who are struggling with bills fairly, and welcome their commitment to reach out to those who most need help this winter. Where help is not forthcoming, we will not hesitate to act.

“I appreciate this is extremely difficult news for many people, my commitment to customers is that Ofgem will continue to do everything we can to ensure they are protected this winter, especially those in vulnerable circumstances.”

Surging global fossil fuel prices are already driving up inflation for consumers, reported to be making fixed rate energy tariffs not covered by the price cap, as well as petrol and diesel more expensive.

The price cap offers a safety net for customers who haven’t switched by making sure that suppliers only pass on legitimate costs.

According to Ofgem, those on default tariffs are saving an estimated £75-£100 or £1 billion every year as a result.

Last week suppliers also signed up to an industry commitment to reach out to those who most need help this winter.

Energy UK’s chief executive Emma Pinchbeck commented on the announcement: “We know this price rise will come at a difficult time for many customers who may already be facing financial challenges.

“Suppliers recently reaffirmed their commitment to provide as much support as possible to those worried about energy bills – as they have done so since the pandemic started, providing hundreds of millions of pounds in financial assistance to customers. Any customers worried about bills should contact their supplier so they can see what help might be available.

“In recent months the cost of buying energy, in particular gas, source for much of our electricity as well as heating and cooking, has reached record highs.

Wholesale costs make up 40% of the average bill and the global factors driving prices up are out of retailers’ control.

Ofgem sets the price cap at a fair level for customers but it also needs to reflect when suppliers face increased costs to allow them to keep operating in a market where most providers are making little or no profit at present.

“Continuing the transition to our own clean sources of power and further reducing our dependency on fossil fuels for our heat and power, will not only help us meets our climate change targets but remove the risk of customers being exposed to volatile price rises like this one.

“It also underlines why making our homes energy efficient, which can permanently cut bills by hundreds of pounds a year, should be a top priority.”

Ofgem adjusts the price cap twice a year based on the latest estimated costs of supplying energy.

According to the regulator, the biggest and most unpredictable factor is the wholesale cost of electricity and gas paid by suppliers and influenced by global markets. This accounts for roughly 40% of the overall price cap level.

Gas prices have risen to a record high in Europe due to a recovery in global demand and tighter supplies. This is increasing the cost of heating homes and pushing up electricity prices.

Last winter, the level of the cap fell by £84 after passing onto customers the savings from lower wholesale energy costs as countries went into lockdown and demand fell.

Dr Jon Hiscock, CEO of Fundamentals, an electrical grid technology company, commented: “Energy price hikes are a symptom of our emissions challenge. Britain’s energy networks need to be rearchitected to deliver emission-free energy for the nation.

“The lifting of the price cap will be welcome by energy providers looking to invest in upgrading their networks. It’s important though, that households don’t face price hikes and blackouts in equal measure.

“Price rises should not eclipse the challenge of maintaining our electricity supply and meeting net-zero targets. Each axis of this energy trilemma is intertwined. Demand for electricity is increasing. Energy usage needs to decline to help deliver against our net zero target. And, ensuring electricity is accessible to all, requires an industry overhaul.

“To maintain progress towards a decarbonised future, even more generation and storage will need to be added to the grid. Network operators need to manage flows of new forms of power generation (e.g., wind and solar) to and from the grid. And this requires either expensive new equipment or new techniques such as advanced voltage control.”

More information about the gap is available on the Ofgem website.