Why are energy bills going up and what does the price cap mean?

Stove using gas energy

The reason why energy bills have been going up in recent months (Picture: Getty)

The government has confirmed it is freezing household energy bills at £2,500 per year.

Chancellor Kwasi Kwarteng confirmed in his September 2022 mini budget: ‘This means that for the next two years, the typical annual household bill will be £2,500. For a typical household, that is a saving of at least £1,000 a year, based on current prices.’

Previously, it was announced that Ofgem’s energy price cap would go up every three months, instead of every six – and there’d be a sky high cap of £3,459 coming in October, which is no longer the case.

Energy companies have been going bust since 2021, as rising gas prices led to a global supply crisis, which in turn has led us down the path of more expensive energy costs.

Coupled with the general rise in the cost of living, and you’d be forgiven for worrying about what it all really means for you, your loved ones, and your bank balance.

Here, we’ll explain the energy price cap – and why this is all happening.

Why are energy bills going up?

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Energy bills in the UK are rising for a simple reason – supply and demand.

There’s a lot of demand for gas right now as the cold weather continues across the Northern Hemisphere just as economies are emerging from the Covid-19 pandemic.

Boris Johnson, during his time as Prime Minister, compared this sudden jump in demand to ‘everybody going to put the kettle on at the end of a TV programme’.

However supply is tight at the moment even in the face of higher demand, which means those selling gas wholesale can charge more for it.

Energy firms were going bust left, right and centre in late 2021, as wholesale gas prices skyrocketed – while the war in Ukraine has also caused wholesale energy costs to soar.

Setting heating controls

The energy price cap has been a major talking point throughout 2022 (Picture: Getty)

This is happening all over the globe, and is affecting many European countries – but the UK has been particularly affected because we use so much more gas than many of our neighbours, while the country doesn’t have a huge back-up store of gas available to fall back on.

Since the energy suppliers have to pay huge prices for wholesale gas, this in turn falls back to households across the country, resulting in higher bills to cover the cost.

What does the energy price cap mean?

The energy price cap is the maximum figure that consumers can be charged on a variable dual-fuel rate for typical usage of gas and electricity, for a set period of time.

The cap is set by Ofgem – the government’s energy regulator – and applies if you’re on a default energy tariff, whether you pay by direct debit, standard credit, or a prepayment meter. 

However, the cap doesn’t apply if you:

  • Are on a fixed-term energy tariff
  • Have chosen a standard variable green energy tariff Ofgem has exempted from the cap.

The sign for energy regulator Ofgem

Ofgem is the regulator that sets the cap across England, Scotland, and Wales (Picture: In Pictures Ltd./Corbis via Getty Images)

Essentially, if you’re not on a fixed tariff with an energy supplier for a set period of time, it means that your energy bill can only rise up to the cap.

It’s the rates per unit that are capped, so if you use more energy, you’ll pay more, as MoneySupermarket.com explains.

Ofgem previously estimated that 22 million households are currently on variable rates, with that number going up by around two million customers whose energy suppliers went bust in 2021.

The government has stepped in to freeze the energy price cap for two years – though the cap was previously on track to rise every three months, instead of the usual six.

How much will my energy bills rise by?

Currently, the energy price cap is set at 28p per kWh of electricity used, and 7p per kWh of gas used – with a ‘daily standing charge’ for each at 45p and 27p respectively.

Woman using heater

Many will be concerned about the soaring costs of staying warm this winter (Picture: Getty)

This is set to last until September 30, 2022, with the next price cap rise coming in October 2022.

From October 1, the average unit price for dual fuel customers paying by direct debit will be limited to 34p per kWh for electricity and 10.3p per kWh for gas, inclusive of VAT.

This is less than what was originally planned by Ofgem, but still more than it is today.

Before the government announced the freeze, the price was set to soar to 52p per kWh for electricity and 14p per kWh for gas.

Also from October 1, standing charges will remain at Ofgem’s planned 46p per day for electricity and 28p per day for gas – again for average, direct debit customers.

If you’re now on a fixed tariff at a higher rate due to recent energy price rises, your unit prices will be reduced by 17p per kWh for electricity and 4.2p per kWh for gas.

Changing lightbulb

The cap will rise every three months from now on (Picture: Getty)

The Energy Bills Support Scheme announced in April 2022 by the government remains in place, which will also impact how much people feel the brunt of higher bills.

Most of us in England, Scotland and Wales can expect to get the scheme’s £400 discount on our energy bills – spread out over six months from October 2022.

You don’t need to apply for this, as ‘all households with a domestic electricity connection in Great Britain are eligible for the £400 discount. There is no need to contact energy suppliers concerning this’.

It’ll either come through automatically, if you pay by direct debit, or as vouchers if you use a traditional prepayment meter.

There are a number of other government measures designed to provide people support during the cost of living crisis, which you can find out more about here.

MORE : Household energy bills frozen at £2,500 and businesses given subsidy lifeline

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MORE : Thousands more to get £400 energy bill help after discount is extended

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