Typical household energy bills are set to drop this winter – but experts are warning that the respite may be short-lived.
The government's energy price guarantee (EPG) limited the impact on consumers after gas and electricity prices soared in the wake of Russia's invasion of Ukraine early last year. But the EPG effectively ended in July, because Ofgem’s energy price cap fell to £2,074, below the EPG, and households pay the lower of the two.
Following recent falls in wholesale energy prices, Ofgem has now cut the cap again, to below £2,000 a year "for the first time since April 2022", said The Guardian's consumer affairs correspondent Zoe Woods.
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However, she added, this price is only based on typical usage and will vary from household to household, and "the cost of every unit of energy is still about double what it was two years ago". And the £400 discount on energy bills given to household last year is "not being repeated".
Why have energy bills been rising?
A range of factors determine energy bills, "not just the gas and electricity you use", said Ofgem.
What households pay is also determined by the price of gas and electricity on the wholesale markets, the costs involved in delivering to consumers, and suppliers' other operating costs.
The wholesale cost of energy began rising towards the end of 2021, when "many industries, places of work and leisure facilities" required more energy after most pandemic lockdown restrictions were lifted, said This Is Money.
Pressure on suppliers intensified when Russia's invasion of Ukraine led to cuts in gas supplies to Europe, "which in turn sent European natural gas prices soaring", the site added.
Gas is also predominantly used in the production of electricity, meaning buying and production costs are higher. And these hikes get passed on to consumers.
What has been done to help?
Households have typically benefitted from fixed tariffs, which offer certainty and were kept low by competition in the energy market. Most fixed tariffs disappeared following the spikes in costs over the past couple of years, but "a few" energy companies are now offering these deals again, said Which?, including British Gas and EDF.
Signing up for a fixed tariff "used to make sense", said This is Money, as customers are "charged the same rate" regardless of wholesale prices. But some of the fixed deals that have reappeared have been "expensive", and consumers should avoid "anything higher than the current price cap".
The alternative is standard variable tariffs, which are the default prices that customers usually pay when a deal ends. Standard variable tariffs were historically linked to an Ofgem price cap that sets a maximum price that energy suppliers can charge consumers for each kilowatt hour of energy used.
Last year, most domestic energy customers also benefited from a £400 government-funded discount on their bills. But support is now being focused on vulnerable households, with a £900 cost of living payment for people on means-tested benefits, £300 for pensioners and £150 for disabled people.
The government also spent £18 million on an "It All Adds Up" energy-saving awareness campaign with TV and radio advertising campaigns that ministers claimed "could help UK households cut hundreds of pounds off their bills".
Will energy prices come down this winter?
After reaching record highs last year, wholesale gas and electricity prices fell by around 85% and 80% respectively in the first half of 2023.
The falls were driven, in part, by a drop in the UK's demand for gas, said the Financial Times "as strong wind speeds and high levels of imports from continental Europe" cut the amount of gas used for electricity generation.
Traders are also becoming confident in the ability to refill gas storage sites across Europe, said the newspaper, despite lower Russian exports.
However, forecasts by Cornwall Insight "show prices continuing to languish well above pre-pandemic prices – something which is currently forecast to remain the case for the remainder of the decade".
And the start of 2024 could bring another rise in energy bills, the energy analyst has warned. Wholesale prices are typically higher in the first three months of the year, and "volatility" caused by strikes at two large liquefied natural gas (LNG) facilities in Australia could push prices up further.
The consultancy forecast that the price cap would rise slightly to £1,897 for the first quarter of 2024, before dropping to £1,819 between April and June, and then £1,781 from July.
Millions of household are already paying more now that government support "worth £66 a month" has now been withdrawn, said Sky News.
Ofgem chief executive Jonathan Brearley told the broadcaster that it would be "helpful" to reintroduce these subsidies.
Charities and suppliers are also calling for the government to create a social energy tariff that would offer a subsidised, below-cost price rate to low-income and vulnerable households.
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