Under Ofgem’s latest price cap revision, annual energy bills for typical households are expected to fall to £2,074 from 1st July 2023 – the lowest in over a year.
The Energy Price Guarantee (EPG) that the government introduced last October capped energy prices per unit to limit the average bill to £2,500 a year until 30th June 2023, helping domestic consumers to save compared to Ofgem’s £3,280 cap for the current quarter.
The EPG is due to increase to £3,000 from 1st July
and will remain in place until March 2024, but Ofgem reducing their cap to £2,074 means most people are unlikely to pay that much.
This seems like good news for families, home-based employees, and small business owners working from a residence – but will energy bills really change that drastically?
Why is the energy price cap going down?
Since the energy price cap was introduced in 2019, setting a maximum rate for standard tariffs to prevent suppliers from overcharging customers, the regulator Ofgem has increased the frequency of its energy price reviews from twice a year to once every three months.
Over the last two years, the price cap kept increasing due to a range of factors, including wholesale gas supply issues exacerbated by Russia invading Ukraine in early 2022. More than a year on, even as the war continues, European gas prices have dropped as supply is able to meet demand again.
Quarterly reviews of energy market rates allow Ofgem to adjust its unit price cap as closely as possible to the market’s fluctuations, which is why the cap soared to £4,279 in the first quarter of 2023 and is now dropping to £2,074 in the second half in response to lower demand.
This cap will take effect from 1st July – 30th September 2023, and Ofgem will announce the next energy price cap for the last quarter of the year at the end of August.
How will this affect households in the UK?
Most household energy bills haven’t been as high as the Ofgem price cap since last October, thanks to the Energy Price Guarantee. Though the EPG is increasing by £500 in July, many will see their bills fall to the lower Ofgem price cap instead.
This means the average customer on a variable tariff is expected to pay around £400–450 less annually based on the current price cap. However, it’s important to remember that the cap applies to the price per unit, not energy bills in general.
So, if you use more energy than average, you will still end up paying more for your increased usage, and if you use less energy, you could save more than the estimate. This will depend on your property’s energy efficiency, the number of people living in it, and how they use it.
It’s also important to note that even with savings of around £400 under the new price cap, the average household will essentially be paying the same as they were last winter, when the government’s temporary Energy Bill Support Scheme provided a £400
discount.
Therefore, despite the latest Ofgem cap being lower than the previous cap and the EPG from April to June, most people won’t see much of a difference in their energy bills after all.
What does this mean for future energy prices?
Though the Ofgem price cap dropping from £3,280 to £2,074 seems like a dramatic reduction, the current cap is still much higher – almost double – than the £1,162 it was before wholesale gas prices began to increase in August 2021.
Experts across the industry predict that energy prices will remain stable for the rest of 2023 and into 2024, meaning households will have to adjust to annual energy bills remaining at around £2,000 for at least the next year.
Unfortunately, this could continue for several more years, as the Energy and Climate Intelligence Unit (ECIU) predicts that annual energy bills may not fall below £1,700 for the rest of the decade.
That said, there’s hope that stable prices will enable the return of fixed energy deals with competitive rates. This could help customers to save money and budget better with a fixed price – but there’s still the risk of fixed tariff customers paying more than variable tariff customers if market rates fall below the fixed rate.
You can find more information about the energy price cap and Energy Price Guarantee in the government’s research briefing, and Ofgem will publish their next price cap review on 25th August.
If you need assistance with financial planning for the current year, especially if you are a self-employed small business owner who works from their residence with specific tax considerations, you can always reach out to our Barnsley accountants to learn more about our services at gbac.