Energy prices: Significant rises to come, says regulator Ofgem

Households will again see “significant rises” in energy prices next spring, regulator Ofgem has warned.

Its chief executive, Jonathan Brearley, said the price cap, which limits how much energy providers can charge per unit, would go up again because of the “unprecedented” rise in gas prices. The cap is revised twice a year and is next due to be changed in April.

Natural gas prices are at record highs as economies around the world begin to recover from the Covid crisis.

As a result, firms that supply gas to householders are running into trouble because they have agreed to sell energy at less than the price it now costs them to buy it.

Last month, nine of those companies went out of business, forcing 1.7 million customers to move to new suppliers.

Ofgem’s Mr Brearley told the BBC that the price cap was there to stop firms making unfair profits, but “legitimate costs have to be passed through”.

He said it was too early to say how much the rise in April would be or whether Ofgem would have to review the price cap more frequently in future.

However, he added that the regulator might have to look at the formula according to which the cap was set.

His warning comes as domestic customers are still reeling from the latest price cap increase, which took effect for households in England, Scotland and Wales this month.

Households in Northern Ireland have also seen a recent sharp rise in their bills, but they are not protected by the energy price cap for Great Britain.

The energy crisis falls into three broad stages for UK consumers and businesses.

Firstly, the here and now. Domestic customers have seen a rise in direct debit demands and bills from suppliers. They are, however, protected from the extreme cost of gas on the wholesale markets by the price cap. Businesses are not. Many are seeing instant and large increases in their energy bills.

Secondly, as Ofgem confirms, significantly higher energy prices in the spring are inevitable, potentially adding hundreds of pounds to an annual household bill. That is something which customers can do nothing to stop.

Thirdly, a review by the regulator will consider the extent to which the price cap protects customers versus the extra burden it places on all bill payers picking up the cost if the cap causes suppliers to fold.

At any point in this process, the government can step in. Thus far, it has shown little appetite to do so.

When the price cap was increased on 1 October, about 15 million households faced a 12% rise in energy bills.

That was the biggest jump, to the highest amount, seen since the backstop was introduced in January 2019.

Those on standard tariffs, with typical household levels of energy use, saw an increase of £139 – from £1,138 to £1,277 a year.

Prepayment meter customers with average energy use saw a £153 increase.

The next revision to the energy price cap will be decided by Ofgem in February, but will come into force in April.

Even if wholesale gas prices were to drop significantly from now, the extra costs that suppliers have had to shoulder in the last couple of months means a steep rise in household bills in April is inevitable.

Analysts Cornwall Insight said that the cap could go up by £400, meaning that a household with typical energy use would pay about £1,660 a year.

On Thursday, National Energy Action, a charity, said that between 1.2 million to 1.5 million additional households could be hit by fuel poverty next year.

Meanwhile, Business Secretary Kwasi Kwarteng is to hold talks later on Friday with representatives of industries which have the heaviest energy consumption, such as steel, cement and chemicals.

While the price cap helps households, there is no such safeguard for businesses, which have to absorb the full impact of rising global energy prices.

They have called for government help to control costs and keep plants open.

The UK has lower levels of gas stored than many other European countries, making it more exposed to global price volatility.

Mr Kwarteng said on Twitter protecting consumers from rising global gas prices was “his top priority”.

His meeting with the Energy Intensive Users Group (EIUG) will include representative bodies UK Steel, the Chemical Industries Association, the Confederation of Paper Industries, the Mineral Products Association, the British Glass Manufacturers Federation, the British Ceramic Confederation, BOC, Air Products and the Major Energy Users Council.

Ahead of the meeting, the director of UK Steel, Gareth Stace, told the BBC that the government needed to step in to help industries cope with the rising cost of energy.

“If the government does nothing, then tomorrow there’ll be a steel crisis, and in terms of what impact that could have on jobs, then that wouldn’t be good, not only for the steel sector, for those regions where steel, is but for the UK economy as a whole,” he added.

Last month, high gas prices forced two fertiliser factories to close, cutting supplies of carbon dioxide which is widely used in food production.