Why Ofgem’s latest energy price cap announcement could cause confusion

Will you be shelling out more for energy this winter or not? Today’s announcement from Ofgem may be proving confusing. The regulator revealed that electricity rates will rise from 26.11p a kilowatt hour to 26.32p, and gas charges will rise from 7.33p to 7.97p for households that pay via direct debit.

But – and here’s where the confusion comes in – a typical annual dual-fuel bill will apparently fall from £1,862 to £1,723. So what’s going on?

The answer lies in how Ofgem calculates the cap. It is now assuming households use less energy than before. Under the old methodology, the same underlying costs would have produced a typical bill of around £1,935 - over £200 higher than the figure announced today. In other words, part of the reason the headline figure looks like a move in the right direction is a change in the sums behind it, not a change in the price of energy itself. The real-terms rise in what energy actually costs is bigger than the £1,723 number suggests on its own.

Why is this happening?

A few things are pushing up prices.

Conflict in the Middle East has driven global gas prices higher. At the same time, heatwaves across Europe this summer meant power plants burned more gas than usual to keep up with demand for electricity. Together, that's pushed up the cost of the gas that heats and powers UK homes.

However, research from Boston Consulting suggests a larger part of the increase is down to the cost of network upgrades and policy choices by the government.

Cornwall Insight expects bills to rise again in January based on current market conditions, though that could shift depending on how the situation in the Middle East develops.

What about the VAT cut?

In July, Prime Minister Andy Burnham announced the government would scrap VAT on household electricity bills from 1 October, in his first policy move in office. He described it as a way to give people some breathing space, with the aim of saving the average household around £45 a year.

Without that, the rise announced today (26 August) would have been bigger.

An expert view

Craig Lowrey, principal consultant at Cornwall Insight, says this rise underlines how exposed UK households are to events on the other side of the world. VAT cuts and similar measures can ease the immediate impact, he says, but they don't change the fact that Britain still relies heavily on imported gas. He argues that while that dependence continues, the risk of sudden price shocks isn't going away. For Lowrey, that's the clearest case yet for reducing the UK's reliance on volatile international gas markets.

Lowrey has also pointed out that while price rises are never welcome, the timing here - right as winter sets in - makes this particular increase especially tough on households already struggling.

What this means for your household

If you're already finding it a stretch to cover the monthly bills, it’s worth taking action now before the cap change lands in October:

To help you prepare, you can get a personalised estimate of how much your bill is likely to increase by using household bills calculator. Just enter your current monthly bill in the energy section and it’ll give you a tailored estimate to help you plan ahead. Once you have a more accurate idea of how much your bill is set to rise by, you can work out your next steps.

Speak to your energy supplier

If you’re already behind with your energy bill or worried you could end up falling behind when prices go up, speak to your provider.

They might be able to offer:

• grants
• payment plans
• advice on managing your account

Check you’re not missing out on benefits

Use our benefits calculator to find out what financial support you could be entitled to.

Or you can give us a call and we’ll look into what you could claim. You could be missing out even if you’re working full time.

Speak to us

If you’re struggling to pay back money you owe, we can run through your budget and work out what options you have. You might be surprised at the range of help available.

Reduce your energy use

Making lots of small changes like only using your washing machine when you’ve got a full load, turning lights off in empty rooms and taking shorter showers can end up making a big difference to your bills over time.

We’ve put together a list of 50 smart energy-saving tips to help you get started.

Get on top of your budget

Energy is just one essential cost that comes with running a household.

So make sure you know exactly how much money you’ve got coming in each month and where it’s going, so you can prioritise your spending and identify possible savings.

Check our guide to creating a budget to find out more.

More help

You’ll find lots of other tips and advice on saving money on the energy hub on our website.