Martin Lewis: Why your energy bill might be going up by MORE than 54%

Key links: What to do if you're struggling to pay your energy bills | Housing & energy grants | What is the energy price cap? | Energy direct debits help

You can turn on subtitles by selecting the closed captions icon at the bottom right of the video.

Here's a full transcript of Martin's analysis on why your energy bills could go up by more than 54%

"Hello, I'm Martin Lewis from MoneySavingExpert.com. I just wanted to record a quick video to answer a question I'm getting a lot of at the moment.

"Here's an example from Twitter: 'Hi Martin, can you look into the rises in utility bills, mine is going up circa 200%. That's nearly trebling, not the 54% that you keep quoting, get the truth out there.'

"Well, I can think of a number of reasons why people were being asked to pay much more than the 54% increase, other than just the fact that they're being shafted (although 200% is a lot). So let me try and take you through this.

"The first thing that you need to understand is that 54% figure is the AVERAGE rise in the price cap that's going to happen on 1 April this year.

"Now, the price cap applies only to standard variable tariffs, which is the default tariff that you're moved on to. So you'll be on the price cap if you've never switched. You'll be on the price cap if you were on a fixed-rate deal, it ended, and you didn't do anything (you get moved straight to the price cap). And you'll be on the price cap if you were with a company that went bust and you were automatically moved to a new firm within the last year.

"And that means that most people are now on price cap tariffs. Now, exactly how much those [tariffs] are going to rise by depends on where you are in the country (because it's regional), your exact usage, and how you pay – whether it's direct debit or prepaid or quarterly billing – but in all of them, it's around a 50% rise.

"So if you're paying around a grand a year at the moment, then that rate is going to go up to the equivalent of £1,500 a year. The exact way it works (and I've covered this in videos before and you can look at my price cap article on MoneySavingExpert.com) is it's actually an increase in the unit rate you pay for gas and electricity, as well as the standing charge. 

"The electricity standing charge has gone up a lot as the energy regulator Ofgem has said it needs to cover the [increases in the] fixed charges that have been happening. I'm not going to talk about that here, because I've talked about it before." 

'There are three reasons why your bill may have gone up by more than 54%'

"So, what are the reasons that it [your energy bill] would have gone up by more than 54%? There are three main categories:

1. "The first is that you were on a cheap fix and you're coming off that fix on to the April price cap. So, we've got the current price cap, and for someone on typical use, if you fixed a year ago on a really cheap fix, you'd be paying £800 a year. The current price cap is around £1,270 a year. Then from April [this year], the price cap is £1,971 a year. So, you would expect what you're paying to more than double, if you're coming off a cheap fix now and moving on to the April price cap. That's the first reason.

2. "The second reason is that you have chosen to fix and to get a fixed rate now. Fixed rates are not governed by the price cap.Most of the open market fixed rates at the moment are very substantially more expensive than the April price cap rates – you'll be paying around 40% more than those April price cap rates. In fact, there are no decent fixes available by using a comparison site and going on the open market.

   "If you do want to fix, your best bet is with your existing supplier, but only Octopus and E.on have come out with anything reasonably competitive in the past month or so.

   "So my rule of thumb, and I know this is a bit complicated, is find out what they're asking you to pay in April and if they're offering you a fix that's no more than around 15% to 20% more, if you want price certainty, go for the fix. Otherwise, stick on the price cap – at least we know what that will be for the next six months.

   "By the way, I have to make a lot of assumptions to do the maths behind that. There's no way to know whether, with hindsight, that'll be proved to be correct. So please just understand, it's my best guess; it can't be a firm answer. So that's the second reason anyway: you've moved on to a fix that isn't governed by the price cap.

3. "The third reason is probably the most common and it may well work in conjunction with the first two. And that is the fact that you have to understand that if you pay by direct debit, then the amount you pay doesn't just depend on the rate that they're charging you for using energy, it depends on how much energy they're estimating you will use. So if they have increased the amount they estimate that you will use, then you will see the amount they are asking you to pay each month increase."

'If you're in credit and are being asked to pay substantially more than the price cap increase, ask your energy firm why'

"Now of course, most monthly direct debits are meant to be fixed across a year to spread out the usage, so that you pay less than you're actually using in those high-use winter months and you pay more than you're actually using in the low-use summer months; some firms split it into summer and winter tariffs. But that's the general premise, and it's not a bad one as it helps people budget generally.

"But right now, of course, we're seeing an enormous rise in the rate. So you would expect your direct debit to be increasing roughly in proportion with the increase in the rate, so for people on the price cap that's around 50%.

"Now some firms might be saying: 'We're pretty sure it's going up in October, so we're increasing it [your direct debit] in advance.' I don't think that should be happening and I'd like to hear details if they're telling you that's the reason that they're doing it.

"But here's the issue: it is an estimate of usage. Now, if you are commonly in energy debt, so that you normally owe money, that may well mean that estimate isn't big enough. So it's legitimate for them to increase that on top of the increase in rates.

"So if it's going to 100%, if it's doubling, and you're generally in energy debt, it's probably relatively legitimate – you can do the numbers if it's disproportionate. But if you're in credit, then it is very tough to see why your direct debit should be increasing by anything that's out of rough proportion with the increase in rates. So for someone on the price cap, again, that's 54%."

'If you aren't happy with how much your direct debit is increasing by, you can complain'

"Now, some firms are doing this and they're doing it because, well, they're changing your direct debit anyway so they're seeing it as a time to increase the estimate of usage. But if that happens, then you need to understand that under energy firms' licensing terms and conditions, you have a right to a fair direct debit.

"So if you're in credit and they're asking you to pay substantially more than the rate increase, then you need to go to them politely – do a meter reading first to make sure that's up to date – and ask them: 'Why are you increasing my direct debit so much when my rate is not going up that much?'

"If the answer is: 'We think you're using more', then say: 'Well, hold on, I'm in credit and I'd like you not to do that'. If they disagree and you think that the amount that you're being charged after you've heard the explanation – and always do it politely as call centre reps are having a hard time at the moment – then I would make a formal complaint to them and ask them to lower the direct debit. If that doesn't work, then take them to the Energy Ombudsman.

"So those are the three reasons: number one, you've come off a fix; number two, you're going on to a fix; and number three, they're increasing the estimate of your usage.

"There's a lot more help on all of this, including whether you should fix or not, what your rights are if they're upping your direct debit and how to complain to the Energy Ombudsman, in the guides on MoneySavingExpert.com. I hope that helps."