If energy prices are going down, why are my bills going up?

The news over the last two years has been dominated by stories of skyrocketing energy prices. Global competition for gas and the war in Ukraine have contributed to record spikes in the wholesale cost of energy – the price energy companies pay for the power they then sell to homes and businesses. But recently, that’s changed. Wholesale prices have fallen dramatically since their peaks in summer 2022. And yet, from 1 April, the monthly bill for a typical UK home is set to increase by £75. That’s causing many people to ask, “If energy prices are going down, why are my bills going up?”

How we got here

To understand why bills are going up, you first need to understand the price protections that have been introduced by government to protect consumers. There are three:

The energy price cap

Introduced in 2019, the price cap limits the unit rates that suppliers can charge customers on ‘standard’ tariffs. These are the tariffs that you end up with if you don’t choose an alternative ‘fixed rate’ tariff. Most homes in the UK are currently on standard tariffs.

The price cap is designed to stop companies making ‘excess’ profits and in normal market conditions, it still allows suppliers to make money from offering tariffs that are cheaper than the cap.

It’s set quarterly, based on wholesale energy prices in the previous months. That means that if prices were rising last quarter but are falling this quarter, the price cap still goes up.

The Energy Price Guarantee

Because the price cap tracks wholesale prices, if those prices go through the roof, so eventually will the price cap. By autumn 2022, the price cap was heading to eye-watering levels, so government stepped in and introduced something called the Energy Price Guarantee (EPG). The EPG applies a discount to the price cap to keep the bill for a typical home at a lower level – initially £2,500 a year.

The Energy Bill Support Scheme

In addition to the limits imposed by the EPG, the government is also providing every household with a £400 grant, applied through people’s energy bills over the six months from 1 October 2022 to 31 March 2023.

April 2023: A perfect storm

Two things are happening in April 2023 that combined are going to result in a big increase in household bills. The first is that, in an effort to reduce the amount of taxpayers’ money required to pay for the Energy Price Guarantee, the discount it offers is being reduced. This means that, for a typical home, the EPG will only discount the price cap unit rates to the equivalent of £3,000 a year, rather than the £2,500 a year that applied from 1 October 2022 to 31 March 2023.

On top of this, the monthly payments for the £400 Energy Bills Support Scheme grant are due to come to an end. The combined effect of this will be equivalent to a £900 annual increase for a typical home. Given that current energy prices have already pushed an estimated 7.4 million homes into fuel poverty, these additional rises are likely to have a crippling impact on households across the country.

Bills will fall later in the year – but not back to their previous levels

One of the reasons that the April increase is going to be so big is that falling wholesale prices have not yet fed through into the price cap. If they had, and the price cap had fallen to below the level of the £3,000/yr limit set by the Energy Price Guarantee, then the price cap would take precedence, keeping bills at a lower level. But, because the price cap is based on historic wholesale prices, the peaks of late 2022 are still reflected in its April level – £3,280 for a typical home.

The good(ish) news is that the current lower wholesale prices will be reflected in the price cap for the following quarter, from 1 July 2023. As the chart below shows, current forecasts are for the price cap to fall to somewhere around £2,150 a year for a typical home, and remain around that level through the rest of the year.

What does all that mean for me?

Here are our key take aways from all that:

1. The energy crisis is not over. If current forecasts are accurate, and the price cap falls to around £2,150 a year for a typical home, that will only bring it back to the level most homes are paying right now, once you’ve taken the £400 Energy Bills Support Scheme grant into account. That is the same level that has pushed an additional two million homes into fuel poverty.
2. Time to think about switching. Remember that the price cap is designed to allow room for competition, so as it starts to drop below the level of the EPG, suppliers may start offering prices below the level of the cap. Unfortunately, savings may not initially be that large due to a piece of regulation known as the Market Stabilisation Charge, which forces suppliers to compensate competitors if they win customers from them based on price.
3. Assume higher prices are here to stay. For the short to medium term, it looks likely that energy bills are going to remain much higher than the levels we were once used to. There is talk of structural changes to the energy markets – including the introduction of mechanism to make sure that the cheaper cost of renewable energy is passed on to consumers – but these will take time to flow through.

And don’t forget…

• The annual bills we talk about above are for a typical home. If you use more energy, then your bill from 1 April will be equivalent to more than £3,000 a year. If you use less energy than a typical home, it’ll be less.

About Big Clean Switch

Big Clean Switch works with employers to provide up-to-date, comprehensive guidance and equipment to their staff to help them permanently lower their energy bills and cut carbon. If you’re an employer and want to make our guidance available to your people, drop us a line.