Households tomorrow are set to find out exactly how much their energy bills will rise from October as regulator Ofgem announces the new energy price threshold.
Analysts anticipate the price cap, which is effectively the average annual energy bill to almost double to approximately £3,600 from £1,971 currently
What is an energy price cap?
Theresa May created the cap in January 2019 with the aim of preventing energy suppliers from overcharging customers by asserting a maximum price for each unit of gas in kilowatt-hours (kWh).
It is a cap on how much energy providers can charge for energy usage, as well as a maximum daily standing price.
Households pay a fixed daily amount (standing price) even if no energy is used.
How is it calculated?
The energy price cap is comprised of a variety of costs that suppliers typically face, including:
- Wholesale energy costs – over time, this has become an increasingly larger proportion of the price cap, now representing approximately 55% but set to go much higher
- Network costs, which make up the second largest fraction, include the cost of building and running the pipes and wires. This changes depending on location, so there are different price caps for different areas.
- Operating costs come in as the third-largest contributor. This is the cost to suppliers of administration – meter readings, for example.
- Policy costs – this involves energy-saving and emission-reducing initiatives issued by the government.
- Adjustment allowance, EBIT, VAT, headroom allowance and direct debit payment method uplift allowance traditionally make up the remaining few hundred pounds.
What has already happened and forecasts
The energy price cap had been flirting in the vicinity of £1,042 to £1,277 since it was introduced in 2019 and until April 2022 when it was hiked to its current level of £1,971.
Most analysts expect Ofgem to raise the cap to somewhere between £3,550 and £3,750 tomorrow as August, traditionally a quiet month has seen wholesale prices soar.
A Russian squeeze and a rush for supplies ahead of the Nord Stream pipeline’s maintenance turn-off next week, which traders fear might become permanent.
Through Nord Stream is where most of Germany and northern Europe's gas is transported.
Even though the UK is not receiving any gas from Russia (read more), it is still being affected by the volatile market dynamics.
Prices for a therm of gas have risen to 390p from 114.5p a year ago according to the UK National Balancing Point, which includes liquefied natural gas (LNG) tankers, imports piped from Norway and continental Europe, storage and UK natural gas production.
That is being reflected in the forecasts both for the energy cap and inflation generally.
US bank Citi predicted on Tuesday that UK inflation would rise to 18.6% due to the surge in energy and gas prices.
Citi expects the cap to hit £3,717 this week before rising to £4,567 in January 2023 and £5,816 in April, while energy consultant Cornwall Insight has predicted £3,554 from October and more than £5,300 in the second quarter of 2023.
Auxilione, one of the providers of the gloomiest outlooks, expects the cap to rise to £3,576 on Friday, skyrocket to £5,066 in January and then surge to £6,552 from April.