Energy bills set to rocket for millions as price cap is hiked by £139/yr to its highest-ever level – but many can save £240/yr by switching
Energy bills will rise by a typical £139/year for 11 million households in October, as regulator Ofgem revealed the new price cap level this morning – but most can beat the hikes by switching supplier.
The increase is down to Ofgem raising the price cap on standard and default tariffs from £1,138/yr for a typical user to £1,277/yr from Friday 1 October. These tariffs are typically the most expensive ones – and if you've not switched in the last year, it's likely you're on one (do a Cheap Energy Club comparison to see how much you could save by switching).
It comes as no surprise, and we've been warning of a substantial hike for months. It's the largest increase since the price cap was introduced in January 2019 and takes it to its highest-ever level, adding a massive £139/yr to the average household's bills – with the biggest suppliers typically pricing their standard tariffs within a pound of the cap. What's more, it follows a £96/yr increase back in April – so a rise of 23% since the start of the year.
And bear in mind, the new cap level isn't the maximum anyone will pay. The price cap sets a limit on the rates you pay for each unit of gas and electricity, so if you use more, you'll pay more.
According to the regulator, the sharp rise in the price cap is due to rocketing wholesale energy prices (what providers pay for gas and electricity), which have shot up by over 50% since February. Not only has this pushed the price cap up, it has had a big impact on the price of the cheapest deals – with no deals under £1,000/yr for a typical household left, the first time we've seen this for over five years.
Ofgem has also announced a £153/yr increase to the cap for four million households on prepay tariffs – to £1,309/yr for a typical household.
If you find choosing a new tariff confusing, try our free Pick Me A Tariff tools to find the cheapest deal based on your preferences, or you can do your own full-market comparison via our Cheap Energy Club.
'Many could still save £100s with the cheapest deals on the market'
Gary Caffell, Energy & Utilities Editor at MoneySavingExpert.com, said: "We've been warning these hikes were coming due to soaring wholesale costs, but this won't make it any easier for the millions of households affected.
"But you don't need to accept it. If you're on a standard tariff, do a comparison and check if you can switch to a cheaper deal. While we're in unprecedented times and there are fewer hot deals around than normal, many could still save £100s with the cheapest deals on the market.
"Switching is so simple. No one needs to visit your home (unless you want a smart meter) and you won't be left without gas or electricity. All that changes is the price and which firm you pay for your energy – so don't just sit back and overpay when you don't need to.
"And don't be put off by the relatively small savings shown on comparison sites right now as they are compared against the current rates, so in reality it's likely to be a lot more."
You could save a massive £240/yr by switching – but comparison sites will underestimate savings right now
Compared to the new price cap, switching to the cheapest on the market right now would save on average £241/yr, based on typical use. And if you're on one of these capped tariffs, you can't be charged exit fees, so you're free to switch away at any time.
Yet for those on standard tariffs, the savings you see when you compare – in our Cheap Energy Club and on all comparison sites – will likely be massively underestimated as they are worked out against today's prices, which are based on the current price cap level.
We don't know yet exactly how each supplier will change under the new cap, so the new pricing isn't available until they let us know (likely in a few weeks). But don't let that put you off – you'll save much more than any energy comparison site shows at the moment (including ours).
If you're on a fixed tariff, where your rates are locked in, your price won't change until the end of the fixed period.
How does the price cap work?
The price cap sets a limit on the maximum amount suppliers can charge for each unit of gas and electricity you use, and sets a maximum daily standing charge (what you pay to have your home connected to the grid).
Currently, someone who uses a typical amount of energy on a standard or default tariff pays a maximum of £1,138/yr on average, but that is set to rise to £1,277/yr from Friday 1 October.
As the cap limits the price providers can charge for each unit of gas and electricity, if you use more energy, you'll pay more; use less and you'll pay less.
The price cap is reviewed twice a year, with changes coming into effect in April and October. It's set to remain in place until at least the end of this year, with Ofgem to recommend on an annual basis if it should continue, up to 2023.
Struggling to pay your bill? There's lots of additional help available
Between the impact of the pandemic on people's finances, the upcoming end of the furlough scheme and changes to universal credit, another price cap rise is more bad news for household finances, particularly as it'll hit just as the weather gets colder and people are starting to use a lot more energy.
Fortunately, there is help available if you're struggling. Emergency measures put in place to help people struggling with bills due to coronavirus are still ongoing. Most importantly, your supply won't be cut off – disconnections of standard credit meters have been suspended, while prepayment customers can get emergency or additional credit to ensure the lights stay on.
There are also a range of options suppliers can offer if you are struggling, including full payment plan reviews, affordable debt repayment plans, payment breaks or reductions, allowing you more time to pay and access to hardship funds. This is all done on a case-by-case basis, so contact your supplier as soon as you can if you do start to struggle.
Last week, 26 suppliers, covering over 90% of households, also signed up to an industry commitment to reach out to those who most need help this winter. The commitments include a drive to increase awareness of the help available, to make it easier for customers in financial difficulties to get in touch, to improve bill accuracy and step up smart meter installations for prepayment customers.
There are also a range of energy grants to help those on certain benefits with winter bills. For full info, see our Housing & Energy Grants guide, or check Ofgem's website for a full rundown of what's available and what to do if you're having difficulty paying.
Why are prices rising?
According to Ofgem, the price rise is down to wholesale gas prices, which have surged by over 50% since the regulator last updated the price cap six months ago – hitting record highs due to increased demand for energy as lockdown measures have eased across the world.
What does Ofgem say?
Ofgem chief executive Jonathan Brearley said: "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."