‘A market failure’: Ofgem raises energy price cap to £3,549, with further increases likely

Ofgem has warned that prices may get get “significantly worse” during 2023

Ofgem confirmed the price cap increase on Friday (26 August). The move will take average energy bills to £3,549 a year.

The new price cap will come into force in October and run through to the end of December, leaving many households worried as to how they will afford to pay their bills. The new cap will affect 24 million households – about 85% of the population. Want to know how the energy price rises could impact businesses? Click here.

It is important to state that while this has been branded an energy cost crisis, the key contributor to rising costs is gas. Analysis from the Energy and Climate Intelligence Unit (ECIU) has found that is likely to add £2,300 to the average costs increase to date and could surpass £3,000 next year  – around 95% of the total costs.

The cap has already increased once this year. In April, it rose by 54% to £1,974, in reflection of the sharp increases in wholesale gas prices across Europe and beyond. The price crisis has already caused more than 25 UK energy suppliers to go bust, including Bulb.

Ofgem confirmed earlier this month that the price cap changes, which have previously been possible every six months, can now be adjusted every three months. As such, customers can expect further price hikes into 2023.

However, Ofgem is not currently willing to provide projections for the next price cap change in January due to a “volatile” market. When announcing the price cap changes this morning the regulator did warn that prices may get “significantly worse” during 2023.

Policy intervention

The energy cost crisis will be of paramount importance for the next Prime Minister, according to the exiting Conservative leader Boris Johnson. Both Liz Truss and Rishi Sunak have focused on the price crisis during TV debates and hustings but neither has proposed a set manifesto for solving the challenge.

While policymakers have suggested that energy firms do more to combat rising prices – and some energy companies are advocating a price freeze – it is clear that the general public believes this issue should be resolved through policy interventions.

Research carried out by Focaldata, of over 1,000 UK adults found that 47% believe that ministers are to blame for ‘failing to prepare and prevent’ price increases. In comparison, 30% named energy firms as the main cause.

Both the Government and the Chancellor have issued official responses to the price cap increase.

A Government Spokesperson said: “We know people are incredibly worried about rising energy bills, following unprecedented gas prices across the continent driven by global events, including Putin’s aggression in Ukraine and his weaponisation of energy in Europe.

“Direct support will continue to reach people’s pockets in the weeks and months ahead, targeted at those who need it most like low-incomes households, pensioners and those with disabilities. As part of our £37bn package of help for households, one in four of all UK households will see £1,200 extra support, provided in instalments across the year, and everyone will receive a £400 discount on their energy bills over winter.

“The civil service is also making the appropriate preparations in order to ensure that any additional support or commitments on cost of living can be delivered as quickly as possible when the new Prime Minister is in place.”

Chancellor of the Exchequer, Nadhim Zahawi said: “I know the energy price cap announcement this morning will cause stress and anxiety for many people, but help is coming with £400 off energy bills for all, the second instalment of a £650 payment for vulnerable households, and £300 for all pensioners.

“While Putin is driving up energy prices in revenge for our support of Ukraine’s brave struggle for freedom, I am working flat out to develop options for further support. This will mean the incoming Prime Minister can hit the ground running and deliver support to those who need it most, as soon as possible.”

Industry reaction

Luke Murphy, associate director for energy and climate at the IPPR think tank, said:

“This hike in energy prices will be devastating for many families. Many people simply won’t be able to pay, and others would be forced to choose whether their families go cold or hungry. Allowing this announcement to go ahead without setting out what support government will put in place means that millions pf people will fear the consequences of this hike for them and their families.

“The government must act urgently to provide emergency support this winter, by freezing energy prices or providing significant support to households through direct payments, with additional targeted support for those on the lowest incomes.

“Meanwhile, we need urgent reform of the energy market and a drive to reduce our addiction to expensive climate-destroying gas to heat our homes. That means a big expansion in clean energy and a national home upgrade and insulation programme to make all our homes warmer and our energy bills cheaper.”

Simon Oscroft, co-founder of So Energy, said:

“Even though we’ve known for some time roughly what October’s price cap level would be, today’s announcement confirming the level at £3,549 is a sobering body blow for customers. Putin’s war is driving these price rises, and this requires a wartime response from the Government.

“That is why we are calling on the Government to double this winter’s Energy Bill Support Scheme to £800 and to quadruple the Warm Homes Discount for the most vulnerable to £600. This is the simplest, most targeted and crucially the quickest way to get support directly to customers before this price hike takes effect.

The latest price projections into 2023 make for even worse reading, showing bills could increase to over £6,000 next year. This will require further Government intervention, such as the proposed Tariff Deficit Scheme which we support.”

Richard Neudegg, director of regulation at Uswitch.com, said: 

“Here is the signal that the summer holidays are over. After seemingly endless predictions, the true magnitude of the October energy price cap is now clear. Ofgem has rubber-stamped the letters from suppliers that will now start landing on millions of doorsteps informing customers of exactly how much they’ll need to pay for their energy as we go into winter.

“Households will face average monthly charges of £362 based on expected usage – almost three times more than the same period in 2021. Even after the £66 monthly discount currently on the table from the Government, families will need to find on average an extra £169 per month compared to last year, when many household budgets are already maxed out.

“The energy crisis we face this winter must never be allowed to happen again. This is a failure of the wholesale market and, until that is resolved, we won’t have a long-term solution.”

Jess Ralston, senior analyst at the ECIU, said:

“The government doesn’t have a serious plan for dealing with the gas crisis and without one, as the IFS has pointed out, the £15bn bills bailout for this winter may have to grow and be repeated next winter. The elephant in the room is the cost of gas and unless households are helped to use less by conserving heat with insulation, bills will remain high.

“The ECO insulation scheme has knocked £600 a year off the bills of millions of households even before this latest hike, but funding for it remains low. Shifting policy costs on to general taxation will provide only a little relief and more UK gas won’t drop the price as we’re part of an international market.”

Dr Carole Easton, chief executive of the Centre for Ageing Better, said:

“The threat of dizzying increases in energy bills has been looming for months, with today’s announcement confirming many people’s worst fears. Millions now face a long, cold and dangerous winter. Already around 10,000 people die a year because their homes are too cold. There is a clear and present danger that this number will rise significantly this winter without drastic measures.

“Immediate financial support is necessary. Three in ten older households in England with at least one person aged 60 or over are already fuel-stressed before these impending increases. And over 65s are most likely to already be cutting back on gas and electricity. Further rationing will lead to significant negative impacts on their health.

“Lack of access to finance for home improvements is a large part of the problem, but our research shows people need practical support too. We need a national retrofit programme to make homes more energy efficient as part of a broader move to improve people’s homes. This should be supported by a network of ‘Good Home Agencies’ across the country to provide advice, access to finance and practical support.”

Polly Billington, chief executive of UK100, said:

“With households already beset by a cost-of-living crisis, it’s impossible to see how many families will cope with an average energy bill rise of over £1,500 a year. We are looking down the barrel of a bleak winter across Britain. It is clear that urgent action is needed to help communities now.”

“But while cash handouts are a vital short-term measure to support the most vulnerable across the country, we cannot pretend that those funds are going anywhere but straight back to the energy firms already making record profits.”

ScottishPower’s chief executive, Keith Anderson, said: “

The size and scale of this issue is truly catastrophic for UK households and that’s why only a big solution can tackle it once and for all to shelter people from the worst this winter.

“We have offered the Government a plan, backed by the industry, that can be delivered this year, tailored in line with their priorities and will support the UK economy – with the cap set at £3,549, what billpayers need now is to hear what additional help is coming.”

Mike Thornton, Chief Executive of the Energy Saving Trust, said: 

 “The UK Government’s response needs to match the scale of the emergency. While rapid action to support the most vulnerable is critical, we also need robust measures to ensure this does not happen again. Forecasts suggest that price hikes may continue beyond 2023, so as well as shorter-term help with bills, this long-term problem requires long-term solutions that deal with the underlying issues.

“Improving the energy efficiency of the UK’s inefficient homes through a mass retrofit programme is the most effective way to permanently get bills under control, reduce our reliance on a volatile global fossil fuel market and cut carbon. Reducing energy demand reduces energy bills, regardless of the volatility of energy markets. Combined, energy efficiency improvements in heating, insulation, lighting and appliances could reduce energy consumption in UK households by a quarter each year. Latest estimates from the ECIU show that better-insulated homes could save well over £1,000 a year on bills at the predicted October price cap level.

“Alongside this, we also need to ramp up investment in renewables and energy storage – including low carbon heating and solar. Tackling the energy crisis is inextricably linked to addressing the climate emergency and the UK’s over-reliance on the global fossil gas market, emphasising the urgency to transition to net-zero.

“Every day of inaction increases the cost of the challenge: we cannot afford to wait for the next Prime Minister to be decided. We need the Government to show leadership and step up now to provide both the immediate and longer-term responses to this crisis that are so desperately needed, including scaling up energy efficiency programmes.”

Green Alliance’s executive director, Shaun Spiers, said: 

“This is yet another reminder that the Government urgently needs to step in to help ease the cost of living. Households also desperately need to see a serious plan to bring down bills in the longer term, through a nationwide programme of home insulation and a huge expansion of clean energy.”

Lily Frencham, the chief executive of the Association for Distributed Energy (ADE), said: 

“Ofgem’s announcement today, and projections for 2023, are truly frightening and continue to underline the need for more support and decisive action. Although some measures have been rolled out, we are still yet to see a clear plan to truly lower bills in both the short and long term. The next Prime Minister will need to act swiftly to prevent lasting damage to the energy industry and people’s lives.

“Current policy is not hitting the mark, with unaffordable increases to the price cap and repeat calls to offer rebates to shore up the system, when we need to be giving suppliers and consumers some stability and long-term confidence. The next Government has the opportunity to unlock massive amounts of private investment for energy efficiency upgrades and low-carbon heat networks – fairer and more sustainable solutions that will protect consumers from future price fluctuations and permanently reduce energy demand.”

Labour’s London Assembly Environment Spokesperson, Leonie Cooper AM, said: 

“Today’s announcement confirms our worst fears about the dire situation awaiting those on the lowest incomes this winter.

“Continued price cap rises into the new year could push almost half of all Londoners into fuel poverty. This is a crisis and we should be seeing the Government announcing emergency measures, but Ministers are missing in action.

“To stop people from freezing this winter, the Government should be freezing energy bills and this could be subsidised by a bigger windfall tax on the huge profits of oil and gas companies. In the longer term, we need much more significant investment in insulation schemes.

“Wider packages of support are also urgently needed to help London’s businesses, schools, care homes and hospitals, which have all been left out in cold so far”.

A Smart Energy GB spokesperson said:

“It’s incredibly tough for many people right now. Energy prices are still rising and it can feel like there is very little that any of us are able to do about it. If you’re concerned about paying your energy bill, it’s really important to remember that you are not on your own, and help is available. First and foremost, have a chat with your energy supplier to find out what support they can provide. You can also contact organisations such as Citizen’s Advice, National Energy Action and Energy Saving Trust who have lots of useful information on getting financial help and support.”