Record-high energy bills, coupled with the rising cost of living, have hit many households over the past year.
Average gas and electricity bills for out-of-contract customers hit close to £2,000 per year in April 2022 – up 54% from the end of 2021. They were set to go even higher before the government intervened with its energy price guarantee in October 2022. The soaring costs have forced some of the poorest families to “make tough choices between heating and eating”, said The Guardian.
What will happen to energy prices in 2023? Energy experts have “made some scary predictions”, said The Money Edit.
Why have energy bills been rising?
Energy prices are determined not just by the amount of energy you use, said industry regulator Ofgem. Suppliers also factor in the price of buying gas and electricity on the wholesale markets, how much it costs to deliver it through the pipes and wires to your home, and their own operating models.
The wholesale cost of energy began rising towards the end of 2021 after most pandemic lockdowns were lifted and “many industries, places of work and leisure facilities were then in need of more energy which put unprecedented pressures on suppliers”, explained This Is Money.
Russia’s invasion of Ukraine led to cuts in gas supplies to Europe, “which in turn sent European natural gas prices soaring”, the financial website added.
Gas is also heavily used in the production of electricity, said uSwitch, so “the cost of buying the gas means it costs more to produce the electricity, and those costs are then passed on to customers”.
What’s being done to help?
Fixed tariffs used to provide households some certainty regarding their payments. These were kept low by competition in the energy market, “but this has all but vanished in the face of soaring energy prices”, said Which?.
The alternative to fixed tariffs is standard variable tariffs, which are the default prices customers usually pay when a deal ends. Standard variable tariffs were historically linked to a price cap set by Ofgem based on energy prices and supplier costs. The cap sets “a maximum price that energy suppliers can charge consumers for each kilowatt hour of energy used”, explained Ofgem.
The Ofgem cap has increased from a typical average price of £1,137 when it was launched in 2019 to £1,971 in April 2022 and was set to hit £3,549 in October 2022. But then the government stepped in, launching its energy price guarantee (EPG) during Liz Truss’s short stint as prime minister. It caps the rate suppliers can charge for each unit of energy to protect customers from steep bill hikes. With the policy in place, the average typical household bill is capped at around £2,500 per year.
But remember, “what you pay very much depends on how much energy you use as the EPG only caps the unit price, not your total bill”, explained The Money Edit.
Without the government intervention, Ofgem said that starting 1 January 2023, its own price cap would hit £4,279 for an average household.
Will energy bills get cheaper next year?
Unfortunately, there isn’t much light at the end of the tunnel when it comes to energy prices.
The government said its price guarantee is “saving a typical household in Great Britain around £900, compared to undiscounted energy prices under the price cap”. But the government cap will rise in May from £2,500 to a less generous £3,000.
And it gets worse. Most domestic energy customers are also benefiting from a £400 discount on their bills, which launched in October and runs until the end of March 2023. Suppliers have been taking £67 off customers’ monthly payments to cover this.
But the discount will be removed just as the price guarantee increases in early 2023, meaning “people are likely to find their energy payments are significantly higher come April as rates will increase at the same time that the £67 monthly payments stop,” said Which?.
An average household bill in April 2023 will still be over £1,000 more than it was just 12 months ago, Dan Atzori, research partner at Cornwall Insight, told MoneyWeek. “It will be critical to reassess support going into next winter before longer-term reforms are introduced in 2024,” he said.
Marc Shoffman is an award-winning freelance journalist, specialising in business, property and personal finance. He has a master’s degree in financial journalism from City University and has previously worked for the FT’s Financial Adviser, the financial podcast In For a Penny and MoneyWeek. This article is based on information first published on The Week’s sister site, The Money Edit