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UK extends energy bills cap beyond 2023 — but tariffs could still rise by £140 a year

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According to a strategy published on Friday, ministers are looking to stimulate competition in the energy sector while keeping bills low. Photo: Gareth Fuller/PA via Getty
According to a strategy published on Friday, ministers are looking to stimulate competition in the energy sector while keeping bills low. Photo: Gareth Fuller/PA via Getty

The UK government has announced plans to extend the price cap on the most expensive energy bills beyond 2023, however, tariffs could still rise by £140 ($192) a year.

The price limit, which was introduced in 2019, caps costs for around 15 million households on default tariffs across the country. It is estimated to save Brits as much as £100 a year for those who get the gas and electricity from the same supplier and rarely change tariffs.

According to a strategy published on Friday, ministers are looking to stimulate competition in the energy sector while keeping bills low.

Anne-Marie Trevelyan, UK minister for energy, said that there was a substantial risk that millions of consumers will be exposed to excessive charging if the price cap expires before conditions for effective competition in the energy retail market are in place.

Under current legislation the price cap is allowed to be extended up to the end of 2023 at the latest, but Trevelyan said extending it beyond that date will ensure consumers are protected.

Customers on default tariffs could also be switched to cheaper tariffs or different suppliers automatically under trials that may take place from 2024. Although people are eligible to opt out, this could effectively ban expensive default rates.

Read more: Utility bills: what can you expect to pay?

“We anticipate that the energy transition over this decade and beyond will drive a greater uptake of electric vehicles, smart systems, and smart appliances, which will increase the average consumer’s engagement with their energy use and the energy retail market,” the government said in an open letter.

“It is important that structures are in place to enable and support consumer engagement with the market.”

The move has put pressure on energy suppliers, with companies such as British Gas, Eon and ScottishPower criticising the cap, which is eating away at profits. However, some firms, such as Octopus Energy, have supported it.

The price cap has seen negative margins for many energy suppliers, exacerbated by some aspects of the current market design, the government said on Friday.

“A market design that leads to expectations of low margins across the market over a sustained period could stifle innovation.”

It comes as energy regulator Ofgem is set to increase the limit by as much as £140 a year due to rising wholesale costs. The headline rate currently changes twice a year as is based on a typical consumer using a “medium” amount of gas and electricity each year.

“We had not expected a price cap extension to be under consideration,” Morgan Stanley analysts said in a note.

Watch: Energy bills to rise by up to £96 for millions as Ofgem hikes price cap

Ofgem’s energy price cap increased to £1,138 from 1 April 2021 for a period of six months. The next increase will be announced in August and will take effect on 1 October.

MoneySuperMarket is urging bill payers on standard rate or default tariffs to switch before seeing their costs rise. It said that if there are more than two members per household, the hike could be closer to £200.

Stephen Murray, energy expert at MoneySuperMarket, said: “The increase in energy bill prices this year has been unprecedented. And if, as now looks inevitable, Ofgem announces this huge increase next month, bill payers on standard tariffs will have experienced a 20% increase in costs this year alone.

He added: “This huge step up in prices will take effect from 1st October, just as heating gets switched on around the country and bills are generally higher anyway.

“The good news is that there is a very simple way of beating these price hikes: if you’re on a standard variable rate tariff, or if your fixed rate deal is coming to an end, you can switch your energy supplier to a better deal.”

Watch: How to save money on a low income

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