Energy price cap to increase by 33%? Here’s how you can soften the blow

Energy prices are already soaring, and there are growing fears that the energy price cap will be hiked in April. Here’s what you need to know.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Wholesale gas prices have QUADRUPLED this year, sending the cost of household energy soaring.

Sadly, further energy price rises may be just around the corner. That’s because the current energy price cap, which limits the cost per unit of energy suppliers can charge, is set to increase substantially when it’s next reviewed.

So what can you do to protect your wallet? Let’s take a look.


Will the energy price cap increase by a third?

According to economic analyst Samuel Tombs, the futures prices of electricity and natural gas suggest Ofgem’s energy price cap will increase by 33% when it’s reviewed in April 2022.

As wholesale costs are already higher than the current price cap, it’s a near certainty that all suppliers will hike their prices up to April’s new limit. This means higher energy bills are on the way for all of us, though some will be thankful that any increase in April will come after the colder months.

Despite this, it is worth knowing that some suppliers are calling for the price cap to be increased before April, claiming it is ‘unfit for purpose‘. A host of energy suppliers have folded this year and many have put their demise down to the cap. That’s because suppliers have been unable to recoup the costs of soaring wholesale costs by hiking prices.

Despite these criticisms, the government has recently confirmed that they have no plans to increase the price cap before April.

How much will my bills rise in April? 

Should the energy price cap increase by 33% as suggested, then a typical household on a default tariff will see their energy bill climb from £1,277 per year to £1,600 – an increase of £383.

Yet it’s important to take these figures as a rough guide only. That’s because energy usage varies considerably between households, and the cost per unit of energy can differ between regions.

Additionally, the price cap is reviewed twice a year in February and August, and any changes take effect in October and April. As a result, it’s possible that the price cap could be much higher, or lower, six months from April 2022. This is why it’s difficult to determine exactly how much prices will rise by over a 12-month period.

What is the current energy price cap? And how is it calculated?

The energy price cap means typical households on default tariffs currently face annual bills of £1,277. Meanwhile, prepayment customers face annual bills of £1,309. 

Ofgem’s price cap includes the standing charge and the cost per kilowatt hour of electricity and gas. As a result, the price cap doesn’t mean that your energy bill is a fixed sum. In simple terms, the more energy you use, the greater the cost.

On its website, Ofgem says its cap helps to ‘keeps prices fair’ and ensures any drops in wholesale costs are passed to consumers. However, it’s worth knowing that wholesale energy costs aren’t the only factor that influences how the price cap is set.

The price cap is also influenced by network, policy and operating costs. It also takes into account the 5% VAT charge applied to energy bills, which suppliers don’t profit from.


Who is not impacted by the energy price cap?

Currently, there are two types of energy customers who aren’t affected by the price cap.

1. Those on fixed tariffs

Up until a few months ago, cheap fixed tariffs were all the rage. Yet many companies that offered these fixed deals have since gone bust due to rising wholesale prices.

For the small number of energy customers still enjoying cheaper energy through a fixed deal, they technically aren’t impacted by the current price cap. However, as cheap fixes have now disappeared for new customers, when fixed deals end for existing customers they’ll have to pay the same ‘price cap’ costs as everybody else.

2. Those on specialist ‘green’ tariffs

To promote renewable energy, Ofgem allows providers that offer green tariffs an exemption from the price cap. As a result, green providers, such as Good Energy, now sell energy at a much higher cost than the current cap.

If you’re unsure whether you’re on a green tariff, it’s worth contacting your supplier.

How can I protect my wallet from rising energy bills?

Unfortunately, rising energy bills will be unavoidable over the coming months. This is compounded by the fact that switching is likely to be pretty meaningless as all suppliers will charge up to the limit of the price cap.

Therefore, the main ways you can cut your energy costs this winter are to cut down your energy usage or make your home more energy-efficient. 

So, for some useful energy-saving tips, see our guide offering ways to cut down your energy usage.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »