Why do my energy prices change?

Have you found that your energy bill is changing?

Well, you’re absolutely right. The reason behind this? It’s something called a “default tariff cap” or an “energy price cap” that Ofgem, the energy regulator, reviews this twice a year.(1) The most recent one came out this August, with a 12% increase due this winter. You’ll definitely realise the change this year – Ofgem has announced they’ll be increasing the price cap by £96 to £1,138 for 11 million customers on a standard dual-fuel energy tariff, and by £87 to £1,156 for four million prepayment meter customers. Households around the UK will see this price increase in energy bills from October 2021. This may all sound really overwhelming, energy can be confusing at the best of times. This is why we decided it would be best to explain it a little bit better without the confusing jargon.

What is an Ofgem Energy Price cap?

In 2019 Ofgem established a price cap on energy prices to help ease the financial burden of climbing energy costs on UK households. This is reviewed once every six months, with the cap level set for winter and summer energy prices, based on the energy market costs causing your prices to rise or fall. Prices may go up in summer, but your bill will come down as you use less energy. It is worth knowing this is applicable to those on standard variable tariffs and prepayment tariffs. This is the current breakdown of the price cap:

Note: Cost breakdowns above do not add up exactly to total cap levels due to rounding effect. 

What does this graph mean?

This is a breakdown of why and how Ofgem has come to this decision. We’ll explain to you every bit you need to know about what will be on your next energy bill. Wholesale

These are prices that suppliers (like E.ON Next) typically face when buying gas or electricity to supply their customers. However, there’s been some adjustments as mentioned below. Wholesale adjustment

Following a judicial review (JR), a judge ordered Ofgem to reconsider how they calculate wholesale energy costs for the first cap period when the default cap was introduced. This was a one-off £15 temporary wholesale adjustment for the current price cap period so suppliers can recover these costs. Please note: This adjustment will be removed for the next price cap period starting on 1 April. It does not apply to the prepayment level of the cap. Covid-19 cost impact adjustment: In February, Ofgem had said that suppliers had experienced additional costs when supplying credit customers. This resulted in an adjustment allowance for the additional costs. To minimise the impact on consumers of higher bills, suppliers would have to recover some of the costs in a phased approach between April 2021 and March 2022. Please note: There is no new allowance related to Covid-19 for either credit or PPM customers in cap period seven. Therefore, only the remaining float of £95 is included in cap period seven for credit customers in line with our February 2021 decision. Keep reading, you’re doing great! Networks These are for the gas pipes and electricity cables that carry energy across the country into your home or business. Network companies charge your supplier an Ofgem-regulated price for their use of the energy network. This money goes towards maintaining, running and upgrading the networks. Policy costs These costs illustrate how the customer is affected by changes in energy and climate change policy. Operating costs Operating costs represent how much your supplier will pay to deliver the service to you, the customer. DD Uplift This is a direct debit uplift. Ofgem has announced that from 1 April the equivalent per unit level of the price cap to the nearest pence for a typical customer paying by direct debit will be 19p per kWh for electricity customers and 3p per kWh for gas customers.  Smart meter rollout (SMNCC) allowance The Government is committed to making sure all households and small businesses can benefit from smart meters as soon as possible. This is why the Smart meter rollout (SMNCC) allowance has been introduced in June 2020, to help cover the cost of dishing them out to customers. Headroom Ofgem is allowing a headroom allowance between efficient cost and the default tariff cap in the baseline (2017) of £10 (Dual Fuel, Single Rate, Direct Debit). This allowance is set as 1.46% of all cost components, excluding networks under the default tariff cap. 2.14. The headroom allowance is one of the ways to help the net cost pressure of uncertainties not already included. VAT The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. The standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%)(2).

What does this mean for you?

This winter your energy bill could be rising to the highest price yet, due to the rising cost of fossil fuels (2). However, as mentioned previously, this is only applicable to those on standard variable tariffs and prepayment tariffs. According to Which’s calculations, if you consume a medium amount of gas and electricity, you can expect your bill to increase by around £139 per year.(4) If you’re on a prepayment meter tariff, expect to pay around £153 more per year. If you pay when you receive your energy bills, your bills could go up by £149. But the exact extra amount you’ll have to pay all depends on how much power you use. The price cap is not an absolute limit on your bills.

How can you help reduce those costs?

On the bright side, you can help reduce these extra costs. Energy bills are a reflection of how much gas and electricity you consume. With that, you can be more energy efficient in your homes and save yourself money. This is how:

• Switching to a fixed contract will help you from exposure to the price increases. We have a range of fixed and variable energy tariffs to meet your needs. Why not get a quote now?

• Switching to a smart meter may not magically help reduce your costs but it can check your real-time usage and your behaviour. This can help reduce your energy usage, which saves you money. However it doesn’t affect everyone, as we’re all different and behave differently. Find out more about smart meters.

• The Energy Trust recommends turning off standby appliances which will save you £30 a year. And if you install room thermostats, programmers and thermostatic radiator valves, you could save around £75 a year. (5)

• The Energy Trust also recommends that turning your heating down by just one degree could save up to £80 a year.

• Whilst energy-saving bulbs can be a little expensive, it is best to switch in the long run. Switching to energy-saving light bulbs can save you £60 over the bulb’s lifetime as they last up to 10 times longer than traditional bulbs.(6)