Wholesale energy price drops predicted to feed into real prices from July, meaning household bills could fall from the summer
Wholesale energy rates have dropped rapidly in recent months, and energy bills are now forecast to be even lower, undercutting even what MSE founder Martin Lewis explained last week. Analysts at Cornwall Insight predict the energy price cap to drop pro-rata to £2,200 a year for a typical home from July, below the Government's energy price guarantee (EPG) rate – but what does this mean for bills?
Watch Martin explain what it means…
The following video was recorded on 10 January 2023, and while July and October bills are now predicted to be even lower than was thought then, all the principles in it are the same. So watch the video, but understand that now…
- From July: The price cap is predicted to drop to £2,200 a year (not £2,800 as in the video) from 1 July to 30 September 2023. This means that bills will drop by 27% to that level and the EPG won't be needed.
- From October: The price cap is predicted to rise by 2% to £2,240 a year (not £2,835 as in the video) from 1 October until 31 December 2023. This means that bills will be set at that level and the EPG won't be needed.
You can turn on subtitles by clicking the closed captions icon in the bottom right of the video. The clip above has been taken from The Martin Lewis Money Show on Tuesday 10 January 2023, with the permission of ITV Studios. All rights reserved. Watch the full episode on the ITV Hub.
You can also see our Price guarantee guide for further information on what's happening with energy bills. Plus see our Struggling with energy bills guide for more on how you can get the help you need, and our Energy saving tips guide for more ways to save money on your bills.
How energy prices are predicted to change
Most people's energy bills in England, Scotland and Wales are set by a combination of regulator Ofgem's energy price cap (which changes every three months) and the Government's energy price guarantee (EPG). The price cap controls the underlying rates suppliers can charge, while the EPG provides a discount on the price cap rates. Yet if the price cap drops below the EPG at any time, households will pay the lower price.
For a typical household paying by direct debit, the price cap is currently set at £4,279 a year. But the EPG discount reduces this to £2,500 a year, with the Government offsetting the difference.
The EPG will then increase in April to £3,000 a year. Based on current price cap predictions from Cornwall Insight, households will continue to pay this rate until 30 June. Then, on 1 July, the price cap is forecast to fall below the EPG rate, to £2,200 a year, before a 2% rise on 1 October.
However, it's important to note that wholesale energy prices are volatile right now, and these predictions look a long way forward, so things could swing further one way or the other. And these figures are typical bills based on an average household's use – it's the rates that are capped, so if you use more energy, you pay more.
How is the price cap calculated?
The price cap is calculated based on a range of costs that energy suppliers face. The largest cost is the price of wholesale energy – what energy suppliers pay for gas and electricity. This currently makes up about 75% of a typical price-capped bill.
This is also what causes most of the change to the price cap every three months, as wholesale prices are constantly fluctuating. When setting the price cap, Ofgem looks at average wholesale prices in the months leading up to a price cap change.
Current price cap:
1 January 2023 to 31 March 2023
|24 November 2022||1 February 2022 to 16 November 2022
(Ofgem will apply certain weightings due to the longer wholesale price observation period and shorter price cap period)
|April 2023 cap:
1 April 2023 to 31 June 2023
|27 February 2023||17 November 2022 to 17 February 2023|
|July 2023 cap:
1 July 2023 to 31 September 2023
|26 May 2023||20 February 2023 to 18 May 2023|
|October 2023 cap:
1 October 2023 to 31 December 2023
|25 August 2023||19 May 2023 to 17 August 2023|
|This covers the price cap cycle until the end of 2023. It will likely carry on using a similar pattern as above from 2024 onwards.|
Other elements include things such as the costs of maintaining the pipes and wires that carry gas and electricity, or the operating costs suppliers face for billing customers and providing metering services.
There's also what's known as an 'adjustment allowance', which allows Ofgem to factor any special, unexpected costs into the price – for example, Ofgem has added the costs resulting from the spate of suppliers that failed last winter to the price cap from January.