The energy regulator, Ofgem has today announced the new ceiling for the energy price cap, an announcement that was expected to bring a substantial increase for customers.
The new figure that comes into effect on the 01 October will see the cap increase by an eye-watering 80% to £3,549, a figure that many households are unlikely to be able to afford. Put this figure in perspective, just a year ago when the price cap was set it was just £1,400 for the average household.
What has driven the increase?
Put simply its Russia’s invasion of Ukraine. This has caused a squeeze on the supply of energy in the global markets forcing up prices. With the demand heavy winter period approaching many analysts predict that when the next price cap is set in January 2023 that prices will rise even further. Some estimates say these could even exceed £5,000 – a frightening thought for many.
But what makes up the cap?
Many people will assume that the energy companies will be making massive profits at the present time given the huge increases that we are seeing. But that isn’t necessarily the case as the price cap actually limits the amount of profit that your energy supplier can make from the supply of your energy.
The main cost element in the price cap is what is known as the “wholesale” cost of energy which has risen by 131% to £2,491, and it is the wholesale supply market where the massive profits are being seen. Now it might well be that your energy supplier operates in both markets and if that is the case then they will be making big profits from this part of the cap.
Other elements that make up the cap are “running costs”, the actual costs of maintaining the supply network, which have risen by slightly more than 10% or £62 to £674. VAT is the next component and this rises automatically as the price rises. In this cap, VAT stands at £169, an increase of £75. The final two components of the cap are the Green Levies and the suppliers profit. Green levies have increased to £152 whilst at the very bottom is the profit your supplier is allowed to make – and this is just £63.
The price cap, that was introduced in 2018, is meant to reflect what it costs to supply energy to our homes by setting a maximum that suppliers can charge per unit of energy, and caps the level of profits an energy supplier can make to 1.9% with the aim of protecting millions of households.
More help needed
More help is clearly needed for those people who are struggling to pay their energy bills and it is an issue that the new prime minister will need to address immediately upon taking office.
At present, the government has pledged support for all households by announcing a £400 rebate on energy bills which will be paid in six monthly instalments with effect from October. There will be further help for those that are designated as low income or vulnerable households who will receive an additional £650 towards their bills.
However, with this latest increase in the cap this is not likely to be anywhere like nearly enough for many and the government has been urged to step in and announce what additional help will be made available.
Are you struggling to pay your energy bills? If so then the best course of action is to contact your energy supplier direct and discuss the matter with them.
Note: The Price Cap applies in England, Scotland and Wales but not Northern Ireland.
