Energy price cap to rise in October as cost-of-living crisis worsens
The energy price cap is expected to surge from £1,971 to £2,800 a year in October, Ofgem has revealed, as the UK faces "once-in-a-generation event".
Ofgem chief executive Jonathan Brearley has told MPs the regulator is expecting an energy price cap in October “in the region of £2,800”.
The energy regulator said it expects the cap to rise 42 per cent from its current level of £1,971. The news comes after Ofcom proposed to review the price cap every three months, instead of twice a year, in an attempt to bring down prices sooner. Last month, the cap increased by 54 per cent, from £1,277 in October 2021.
“The price changes are genuinely a once-in-a-generation event not seen since the oil crisis in the 1970s,” Brearley told MPs on the BEIS Committee.
Brearley warned that this increase in UK residents’ energy bills may double the number of people in fuel poverty - defined as households that spend over 10 per cent of their disposable income on energy - taking it to 12 million. Moreover, the Resolution Foundation's analysis suggested that the number of families living in fuel stress would rise from five million to 9.6 million.
The UK is currently facing a cost-of-living crisis, with inflation hitting historic levels. The rising prices of energy bills - prompted by the Russian invasion of Ukraine - are the main catalyst of this situation, which could leave as many as 40 per cent of British families facing fuel poverty in the winter.
“I am afraid to say conditions have worsened in the global gas market since Russia’s invasion of Ukraine,” Brearly said. “Gas prices are higher and highly volatile. At times, they have now reached over 10 times their normal level.”
The energy price cap is the maximum amount energy companies can charge someone on a dual-fuel tariff for both gas and electricity prices. It was a measure introduced by Theresa May’s government, with the goal of preventing excess profiteering by the electricity companies, particularly in times of crisis. The price cap is currently adjusted biannually to reflect movements in the wholesale price of energy and prevent energy companies from trading at a loss.
Although less than 5 per cent of the gas the UK imports come from Russia, the country is still affected by prices rising in global markets as demand in Europe increases. Overall, the continent imports around 40 per cent of its natural gas from the Russian giant. As a result of the war in Ukraine, the European Union has made a commitment to divest itself of Russian gas and has begun to look for alternative trading partners in the US and Morocco.
Brearley told MPs he would be writing to the Chancellor about the latest estimates and warned that prices could go up even further if Russia continues to disrupt gas supplies. However, some industry analysts have cast doubts on these claims, forecasting that the cap will remain broadly unchanged after a review in January 2023.
In the committee, the Ofgem boss also apologised for regulatory shortcomings and admitted that, had financial controls been in place sooner for suppliers, fewer firms would have gone bust due to being unprepared for the sharp rise in wholesale prices.
In total, approximately 23 million households have their domestic energy bill governed by the price cap.
“Ofgem’s warning that the price cap will rise again by over £800 in October will strike terror into the hearts of millions of people, already unable to heat and power their homes,” said Adam Scorer, chief executive of National Energy Action.
“It will plunge households into deep, deep crisis. The financial, social and health impacts are unthinkable.”
Energy Secretary Kwasi Kwarteng stated that the chancellor “is committed to more support, more help, before the price cap kicks in”. He stated the government has put forward £9.1bn in support for energy bills, including council tax and energy bill rebates, and an extension of the Warm Home Discount, and added that it had been waiting to see where gas prices were heading before making a decision on further assistance.
In response to Ofgem's price cap forecast, Downing Street acknowledged that energy prices were a "significant challenge", but said the government was "actively looking at what more could be done in this space".
One of the measures that has been discussed to address the situation is the introduction of a windfall tax on offshore energy firms, which could help lower bills for households. The Chancellor is reportedly considering introducing this measure and has faced backlash from 31 companies working in the offshore energy supply chain, who warned that the move would "undermine crucial investor confidence".
Times are not hard for the big oil companies. Shell recently reported a record £7bn profit for the first three months of 2022, while BP made £5bn in profit - its highest in the past 10 years.
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