What's the fuss, and how might it affect you?
Unless you've been living under a rock for the past few months, you've probably seen an endless stream of doom and gloom about the energy crisis, with prices for gas and electric set to soar in coming months. Even for those of us who have seen rising energy bills for years, it can still be daunting, and the huge amount of confusing information out there can be baffling. We've put together a handy quickfire guide to cover the basics.
A price cap that was introduced by Ofgem (the UK's Gas and Electric Markets regulator) in 2019 to limit the amount energy providers can charge for gas and electricity. The cap is updated every 6 months, taking into account factors such as the wholesale cost of energy (the amount the gas and electric companies buy it for).
When calculating the price cap, Ofgem consider an array of factors which are subject to continuous change over time. As well as the wholesale cost of energy, which is the largest increase we're seeing now, they also consider factors such as operating, policy and network costs.
Essentially, wholesale prices for energy are at an all-time high, almost quadrupling in the past year alone. This is due to a crisis in the global supply chain, energy companies are in a situation where if they couldn't increase the charge to consumers, they would be making a significant loss, with 29 energy companies entering administration in the past year alone.
The energy price cap is increasing by 54%. For the average household, this means an increase of almost £700 a year. Remember though that it is the cap itself that is increasing, not actual bills (i.e. if you already use less energy than the average household, your bills will increase by less than the average household).
The energy price cap increases on 1st April (sadly not an April Fools' Day joke), so we will start to see the price increases reflected in the bills we're receiving from then.
The price cap is reviewed every 6 months, so prices are likely to change again in the Autumn. However we do not know whether this will be for the better or worse, dependent on the global economy including factors such as Covid, the EU-UK supply chain, and now the supply of oil and gas from Eastern Europe during the war in Ukraine. Only time will tell what the situation will be in 6 months.
Tariffs are how we refer to the different types of contracts energy providers offer. There are a wide range of tariffs available, but the ones you're most likely to hear about at the minute are:
Default tariff: This is the tariff that most energy suppliers will automatically put you on to begin with, hence the name. This will usually be the supplier's 'standard variable tariff', and it is likely that you will move onto this once any fixed tariff term (see below) comes to an end.
Variable tariff: Variable tariffs change in line with market forces and the fluctuating wholesale cost of energy. This kind of tariff can be advantageous when prices drop, but of course the risk is when prices increase at all, never mind the spike we're currently seeing in energy prices. The energy price cap is designed to keep these rising prices in check, but when the cap rises, so does the variable rate you pay.
Fixed tariff: Fixed tariffs are signed up to for a set period in which the price you pay for energy remains the same, just as you would sign up to any subscription service at a certain price. These fixed tariffs usually last between 12 and 24 months. If you're currently on one of these tariffs, your energy costs shouldn't increase just yet. It's important however to prepare for your bills to rise sharply when your fixed term ends.
Other tariffs: As well as these, you may also come across other terms such as Unlimited, Dual Fuel, Pre-Payment, and Green tariffs. Compare the Market have a great, easy to read guide to different energy tariffs.
Sadly, despite all the negative press it seems there's not a great deal that consumers can currently do to combat the spike in the energy price cap and its effects. The energy price cap is set to rise on April 1st regardless of consumer experts advocating against it, warning of many households being plunged into energy poverty. However, if you are concerned about your situation and finances in light of the increases, there are some options available that are worth considering:
If you need any further information or supporting information on any of the issues discussed in this article, please contact email@example.com.
Written by Ryan Coleflax