Energy prices have risen significantly in the last few years, with the government stepping in to keep prices manageable for households. Meanwhile, the UK’s energy regulator, Ofgem, has continued to review its energy price cap every three months in an attempt to stabilise the market.
Despite this, energy costs have remained high, and many suppliers have even gone into liquidation altogether over the past few years.
That said, there are indications that energy prices have now started to decline in 2023. In fact, Ofgem’s energy price cap fell below the government’s “Energy Price Guarantee” (EPG) on 1 July 2023, the first time this has happened since the EPG’s inception.
So, what could happen in the rest of the year? Continue reading to discover why energy prices rose so much in the first place, how exactly Ofgem’s price cap works, and how costs could potentially change as 2023 comes to an end and 2024 begins.
Several factors, such as Russia’s war in Ukraine and increased demand, have caused prices to rise
Several varied factors, such as geopolitical tensions and heightened demand, contributed to rising energy costs last year, essentially creating the “perfect storm” in the UK.
First, and perhaps surprisingly, the demand for electricity dropped significantly during the Covid-19 pandemic. Though, as lockdowns eased around the world and the pandemic started to subside, the demand for energy climbed again.
On top of this, Russia, one of the major producers and exporters of gas and oil, invaded Ukraine in February 2022. As a result, many nations condemned this war of aggression and imposed sanctions on the country.
In response to sanctions, Russia threatened to cut Europe’s gas supply altogether, and several events occurred that affected market prices, such as the closing of the Nord Stream One pipeline in September 2022. This prompted panic buying, subsequently exacerbating the situation and fuelling more price rises.
Then, when the colder weather arrived during the winter of 2022/23, the demand for gas and electricity climbed even further, reducing supplies. In fact, the Guardian states that it cost the government almost £40 billion to help keep energy bills down during that winter.
Aside from higher monthly costs, another consequence of rising energy prices was that some suppliers in the UK became insolvent. Energy Saving Trust reports that 28 energy companies had gone under by the end of December 2021, including larger companies such as Bulb, which had around 2 million customers.
The “energy price cap” limits how much energy suppliers can charge households
Before energy prices started to climb significantly, Ofgem introduced an “energy price cap” on 1 January 2019 in response to fuel poverty concerns. It was designed to limit how much suppliers can charge households on default tariffs.
Even though the energy price cap is based on the wholesale price of energy, it is only an estimate as to how much the average home is expected to use. So, your costs could be higher or lower than the cap, depending on your usage.
Initially, Ofgem’s price cap was set at £1,137, though it eventually climbed to £3,549 by October 2022 in response to the global issues that pushed up the cost of wholesale energy. This was a significant rise in the space of a few years, so the former prime minister, Liz Truss, launched the EPG on 1 October 2022.
The EPG essentially limits the costs that an average UK household pays for gas and electricity each year. The government does this by paying the difference between the amount guaranteed for household energy bills, and the actual cost, essentially working like a subsidy.
It was originally set at £2,500 in Great Britain and £2,109 in Northern Ireland. Since Ofgem’s price cap was £3,539 when the government first introduced the EPG, your bills were likely reduced.
In fact, according to the government website, the EPG saved the typical UK household in Great Britain around £1,100 from its inception in October 2022 to the end of June 2023.
Moreover, the government introduced the “Energy Bill Support Scheme” between October 2022 and March 2023 to provide UK households with £400 of account credit or a reduction in direct debit payments for energy.
It’s worth noting that the chancellor, Jeremy Hunt, announced in his spring Budget that the EPG would remain at £2,500 until 1 July 2023. Now, the guarantee has risen to £3,000 a year until the end of March 2024.
So, when Ofgem’s price cap fell to £2,074 after 1 July 2023, you likely stopped receiving any benefit from the EPG, as the capped amount is lower than the guarantee.
What could happen to energy bills in late 2023 and early 2024?
While it’s a welcome sign that energy prices are dropping, it’s worth noting that you may still be paying more than you were before energy prices started to rise. This is because demand for energy remains high, and the government’s £400 support scheme has now expired.
The good news is that independent energy research firm, Cornwall Insight, predicts that the Ofgem price cap will be set at £1,878.31 between October and December 2023 – around £196 lower than its current level. This could mean that your energy bills may drop somewhat in the remaining months of 2023.
Even though the research and analysis company estimates that the cap will rise slightly to £1,916.76 between January and March 2024, it could fall back down to £1,888.11 between April and June 2024.
So, while your energy bills may rise at the start of 2024, they could soon drop back down if predictions are correct, meaning you may pay less as the year goes on.
Of course, these predictions will depend on the severity of winter at the end of 2023. As you can imagine, a harsher winter could mean demand for gas and electricity climbs, with bills following as a result.
Since it’s so difficult to accurately predict long-term weather patterns, it’s worth keeping a close eye on Ofgem’s price cap over the coming year so you know how your energy bills may change.
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This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.