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As price cap increases, how much will your energy bill rise by?

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·Senior City Correspondent, Yahoo Finance UK
·5-min read
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A general view of a gas hob burning as consumer groups are predicting that the UK's other major energy suppliers will raise prices after SSE announced an 8.2\% increase in domestic bills.
The price cap increase means people on default tariffs paying by direct debit will see bills go up by an average of £139 per year. Photo: Getty

Brits are set for a big rise in energy bills after the industry regulator increased the cap on prices that companies can charge.

Ofgem, the energy industry regulator, said on Friday that it would be increasing the maximum amount energy providers can charge tariff customers by roughly £139 a year. Pre-payment customers will see bills rise by £152.

"Higher energy bills are never welcome and the timing and size of this increase will be particularly difficult for many families still struggling with the impact of the pandemic," said Jonathan Brearley, chief executive of Ofgem.

"The price cap means suppliers only pass on legitimate costs of supplying energy and cannot charge more than the level of the price cap, although they can charge less. The price hikes have been driven by a 50% rise in wholesale energy costs over the last six months. The cost of gas has hit a record high as a global reopening from COVID-19 lockdowns around the world has led to surge in demand.

Read more: Credit and borrowing: 10 myths and truths you need to know

"I appreciate this is extremely difficult news for many people, my commitment to customers is that Ofgem will continue to do everything we can to ensure they are protected this winter, especially those in vulnerable circumstances," Brearley said.

Here's what you need to know about how the changes will affect you and what you can do about it:

What is the price cap?

Price caps are limits on the maximum amount energy suppliers can charge customers for gas and electricity on certain tariffs. 

A cap was introduced for prepayment meter customers in 2017, affecting around 4 million people. A cap for customers on default energy tariffs was introduced in 2019, affecting 11 million people.

The price cap is meant to ensure energy companies don't gouge people and only charge rates that reflect underlying energy prices. Ofgem says the cap saves default tariff customers an estimated £75 to £100 each year.

Ofgem says: "The market isn’t currently working for everybody. Customers on prepayment meter tariffs can find it harder to access cheaper offers. And people who don’t shop around are getting stuck on ‘default’ deals, paying more than they need to. Default tariffs (which include standard variable tariffs) are a basic supplier offer, and are usually the most expensive."

Read more: Property: How multi-dwelling relief could save you thousands in stamp duty

Price caps don't apply to people on fixed-term energy deals, which typically offer better values.

Price caps also don't limit overall bills — just the rate suppliers can charge per unit of energy used. Usage rates will affect final bills.

What do changes mean for prices?

Price caps are adjusted twice a year in April and October. The latest change — set to take affect from 1 October — means people on default tariffs paying by direct debit will see an increase on average of £139 per year, with average bills rising from £1,138 to £1,277.

Prepayment customers will see an increase of £153 from £1,156 to £1,309.

Direct debit customers can find out what tariff they are on by consulting their energy supplier and bills. Prepayment customers use electricity meters.

Read more: How to take back control of your finances after COVID

£139 and £153 represent estimates of annual bill increases, based on typical energy usage. Those figures factor in the maximum energy rates suppliers can charge customers, but suppliers could choose to offer lower rates.

Who will be worst off?

Low income families will be hit hardest by the changes, according to think tank the Resolution Foundation. 

"A rise in energy prices will disproportionately impact those who are already struggling, with the extra proportion of budgets consumed by higher prices three times greater for those at the bottom of the income distribution compared with those at the top," said Jonathan Marshall, a senior economist at the Resolution Foundation.

"This is also the second price cap increase in six months, with a previous 9% increase in energy costs last April driven, like this one, by rising fossil fuel prices. 

"Going forwards the government must spearhead a successful, permanent switch to cheaper, renewable energy sources — ensuring that this switch is done in a way that minimises the impact on those already in fuel poverty, or at risk of falling into fuel poverty."

Watch: How to save money on a low income

What you can do to protect yourself

The best way to guard against rising energy costs is to shop around. Fixed-term energy deals offer better rates than default tariffs and Ofgem says shopping around can save households up to £100 a year.

"Billpayers can minimise the impact of these rises through the simple act of switching suppliers and your tariff," said Stephen Murray, MoneySuperMarket’s energy expert. "Doing this can deliver significant savings, with the best deals in the market consistently hundreds of pounds cheaper than standard tariffs. 

"It takes just minutes to switch, so if you’re on a standard variable tariff or if your fixed rate deal is coming to an end, take action and shop around."

Controlling you energy usage can also help to limit bills. Turning your thermostat down by just one degree can save the average household £60 a year, according to the Energy Saving Trust.

Read more: 'Couch to 5K' of money launched to help people fix COVID finances

For longer term solutions, customers should look at improving the energy efficiency of their homes through things like insulation, energy efficient lightbulbs and modern boilers.

Customers worried they can't afford their bills should contact their suppliers. Suppliers can offer payment holidays, affordable debt repayment plans, and emergency credit for prepayment meters. Customers could also get rebates of up to £140 under the Warm Home Discount scheme.

"If you're struggling to pay your bill you can get in touch with your supplier to access the help that's available and if possible, shop around for a better deal," Ofgem's Brearley said.

Watch: How to prevent getting into debt

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