How will the new energy price cap affect your bills?

Ofgem has announced the amount energy suppliers can charge for a unit of electricity and gas is going down in April. But what may initially sound like good news will not result in lower energy bills. In fact, average bills are set to go up from April because government support for customers is being reduced.

So, to get you head round why bills are going up when the amount energy suppliers can charge is going down, you need to understand Ofgem's energy price cap and upcoming changes to government support for gas and electricity customers.

What is Ofgem’s energy price cap?

Ofgem’s energy price cap limits the amount suppliers can charge for a unit of gas and electricity with standing charges taken into account. 

Currently, if there was no government support in place, the cap would mean an average household would be looking at an annual bill of about £4,279. From April, the reduced cap would mean an average household would be facing an annual bill of around £3,280.

However, the cap is not currently dictating the amount you pay, as the government is covering some of the cost under its energy price guarantee. So, when the cap drops in April, it simply means the government will pay suppliers less.

Meanwhile, you’ll end up paying more because government support for customers is becoming less generous. 

Government support for energy customers

Last year, the government put in place two main forms of support to help energy customers with rising bills:

·       The energy price guarantee

·       The energy bills support scheme

What is the energy price guarantee?

The energy price guarantee limits the amount suppliers can charge customers for a unit of energy, with the government paying suppliers the difference between the guarantee and Ofgem’s cap.

The guarantee was introduced in October 2022 and is set to end in April 2024. There are two phases of the guarantee:

1 October 2022 – 31 March 2023             Typical household pays about £2,500 a year

1 April 2023 – 31 March 2024                   Typical household pays about £3,000 a year

During the most generous phase of the guarantee (between January and March 2023), the government has been covering about £1,779 a year for a typical household’s energy bill. This will drop to £280 in April, when Ofgem's cap falls from £4,279 to £3,280.

What is the energy bills support scheme?

Under the energy bills support scheme, it was decided households in England, Scotland and Wales (there's a separate scheme in Northern Ireland) would receive a £400 discount to help them through winter. This comes to an end in March.

How much will your bill go up by in April?

So, because the government’s support under the energy price guarantee is being reduced and the energy bills support scheme is coming to an end, the average household will see their annual energy bill go up by about £900 in April.

How’s the future looking?

The government’s price guarantee is set to keep the average household bill at the £3,000 mark until the scheme ends in April 2024. However, it’s widely expected that Ofgem’s cap will take the average bill below the £3,000 level in July, so the amount you pay will be dictated by that rather than the government’s price guarantee. 

Calls for the government to take action

In response to falling wholesale energy prices and the reduction in Ofgem’s price cap, there have been calls for the government to maintain its current level of price-guarantee support so that a typical annual household bill is held at around £2,500. Although the government has not suggested this is on the cards, a number of commentators are hopeful it may be one of the announcements made in the spring budget on 15 March.