What exactly happens to energy bills? – Forbes Advisor UK
It seems inevitable that we will all pay higher energy bills next year. But it’s hard to predict by how much the bills will increase – and not everyone will see their costs increase at the same time or by the same amount.
Why are the bills going up? This is because the companies that supply our homes pay much higher prices in the wholesale markets, especially for natural gas. And this, in turn, is due to the fact that supply has failed to keep up with global demand, as parts of the world have experienced unusual cold spells and economies reopened after the Covid shutdowns.
Other factors are also at play here. Wind farms across the UK have been left idle for much of the summer due to calm conditions, reducing a valuable source of supply. And a critical power cable between France and England was taken out of service by a fire at a power station in Kent.
The UK also has less gas storage capacity than in previous years due to the closure of the Rough plant in the North Sea, making us more dependent on imports.
Ofgem ceiling price
Our suppliers want to pass these higher wholesale costs on to us, their customers. But here, in October 2021, their ability to do so is severely limited. First, 15 million households benefiting from standard “default” and variable-rate prepayment tariffs are protected by the price cap administered by Ofgem, the energy market regulator.
This increased by 12% on 1 October, bringing the average consumption bill to £ 1,277 per year for default tariffs (£ 1,309 for prepayment). These are big jumps that will eat into household budgets over the next few months. But those wholesale prices have risen nearly 300% since January, so from a supplier perspective, the October 1 cap increase now looks woefully inadequate.
The second consideration is what happens to flawless tariffs. For years, the market has been rich with 12-month fixed rate offers that dramatically lowered the price cap, so customers have been encouraged to move away from standard variable rates. But the cost of wholesale energy is such that suppliers can no longer afford to offer fixed prices below the cap level.
Anyone who is already on a fixed rate deal is immune to the price cap hike. But what happens when their deal ends? Previously, the established routine was to switch from one plan to another, precisely to avoid slipping on a relatively expensive default rate with the same provider. But now defaults are the best option available. Much more expensive than the old patch, yes, but there really isn’t anything better on the market.
There is another category of customers that we need to keep in mind – those whose energy supplier has been crippled by market conditions to the extent that they have been forced to go out of business. Nine companies fell into the wall in September, and more are expected to follow suit in the weeks and months to come.
Ofgem – the price cap makers mentioned above – also maintains a safety net for customers of bankrupt energy companies. This ensures that power supplies are maintained and credit balances are honored while the regulator finds another company to support the customer of the failed supplier.
That’s all well and good – but flat rate customers with a bankrupt business will end up on a default rate with their new supplier, running at the Ofgem cap. And that could mean an inevitable price hike of £ 200.
A little more on the cap. It changes every six months, on April 1 and October 1. So what can we expect in 2022?
Let’s take a look at how Ofgem arrived at the 12% increase he just implemented. It wasn’t a calculation on the back of a coaster. As usual, she followed established procedures and made her calculations based on what happened in the wholesale markets between February and July and announced the results in early August.
This meant that he could not take into account the skyrocketing price increases that rocked international stock exchanges in August and September – hence the disparity between the reality of wholesale prices and the new level of the cap (which works in favor consumers, although he may not perceive it).
The April 2022 increase will be announced in February and will be based on wholesale prices for the period last August through January of next year. (Each new cap is revealed well in advance because vendors must give customers 30 days notice of any price increase, and if the cap goes up, you can bet your shoes on a rainy day that they’ll fully match. )
No one expects wholesale prices to drop significantly anytime soon. Certainly some of the supply issues have improved – more natural gas imports into Europe from Russia, more reliable conditions for wind generation – but we are entering the peak demand season. Prices may stabilize, but Ofgem will still be juggling some mind-blowing numbers when it sets the next cap.
That means another jump in bills for just about everyone in April – only those who are hanging on to the dying days of a current patch will stay safe, but only until that patch is exhausted.
How much will the ceiling go up? As mentioned, the main cap for 11 million customers at the default tariff is £ 1,277 for medium-consumption households. Some reports suggest it could reach £ 1,500 or even £ 1,600 as of April.
What seems certain is that the energy supplier market will continue to consolidate and that the number of companies will increase from around fifty to perhaps a dozen. This could mean less competition and even less favorable conditions for consumers, even if there are competitive markets with even fewer big players – take supermarkets, for example.
But it still looks grim for bill payers. There isn’t much more to do at the moment than reduce energy use whenever possible, hope for a mild winter, and keep an eye out for competitive offers that will emerge when inflation goes up. wholesale prices will subside.