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Energy bills 'will climb to £2,000' – here's how the price cap works

·4-min read
how does the energy price cap work
how does the energy price cap work

Energy firms could be allowed to charge households hundreds of pounds more next year with experts predicting bills to rise to more than £2,000.

Regulator Ofgem has signaled it will review how the energy price cap works after a surge in wholesale prices pushed suppliers to breaking point.

The cap, which sets limits on what suppliers can charge customers on default tariffs, prevents energy companies from immediately passing on higher costs to their customers. It went up by £139 this month to push average bills up to £1,277.

It is expected to rise again in April and experts at Cornwall Insight, an energy market analysis firm, said it could climb by almost £400, even if Ofgem does not change how the cap is calculated.

Jonathan Brearley, chief executive of Ofgem, said there are no plans for the price cap on energy bills to rise before April, but warned that "legitimate costs do have to be passed through".

Meanwhile, Joe Malinowski, founder of price comparison website TheEnergyShop.com, predicted the rise could be anywhere from £500 to £800 – pushing the average bill to over £2,000 in a worst case scenario.

How is the price cap set?

Regulator Ofgem sets the price cap based on a "broad estimate" of how much it costs a supplier to provide gas and electricity services to a customer.

The calculation is mainly made up of wholesale energy costs, network costs such as maintaining pipes and wires, policy costs including Government social and environmental schemes, operating costs such as billing and metering services and VAT.

Dr. Craig Lowrey, of Cornwall Insight, said that in addition to spiraling wholesale prices, the cost of moving customers from failed suppliers to larger more stable one will also contribute to the price cap rising.

Failed suppliers will also be unable to pay industry levies, including low carbon levies, leaving surviving firms to pick up the bill, which will also contribute to the cap rising.

How to protect yourself from rising bills

If you are moved to a new supplier, or your fixed-term deal comes to an end, locking in to a new fixed-term deal could currently cost hundreds of pounds more than rolling on to the supplier's default tariff.

Although the price cap has gone up, and is likely to rise further, energy suppliers have also hiked the price of their fixed-term tariffs. For example, last month the cheapest fix was £1,177 while the cheapest fix today is around £1,700, according to Money Saving Expert.

This means it is cheaper for the time being to remain on a default tariff, which is protected by the price cap, until better deals become available.

In some cases, providers have hidden default tariffs from their websites. This means customers may be unaware it would cost them less to simply roll on to their supplier's default tariff, rather than switch deals.

A spokesman for comparison site Compare the Market said: "In most cases, fixed tariffs currently on offer are more expensive than being on a default or variable tariff. We urge people to check carefully before fixing any deal at this point in time."

Cornwall Insight predicts the cap will rise to £1,659 in April and rise again to around £1,663 next winter. Even at these unprecedented levels, remaining on a default tariff would be cheaper than locking in to the cheapest fixed tariff available.

However, if the price cap were to climb by as much as £800, as Mr Malinowski warned, locking in to the cheapest deal now would save hundreds of pounds. This prediction is an outlier, however.

What happens if my supplier goes bust?

If your supplier goes out of business, Ofgem will switch you to a “supplier of last resort”, and any credit with the older energy provider will be transferred across. Affected households should take meter readings as they will need to pass these on to their new supplier.

Gillian Cooper of Citizens Advice said: “If you’re a customer of a failed supplier, Ofgem will move you onto a different one. This can take a few weeks, but your gas and electricity supply will continue in the meantime.

"Your new supplier will contact you and it’s good to be prepared beforehand. Take a note of meter readings, keep old energy bills and make a note of your account balance.

"Wait until your new supplier is appointed before cancelling any direct debits. This should all make the transition easier.”

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