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It seems inevitable that we will all be paying higher energy bills next year. But how much bills will rise by is tough to predict – and not everyone will see their costs increase at the same time or by the same amount.
Why are bills rising? It’s because the firms which supply our homes are paying much higher prices on wholesale markets, particularly for natural gas. And this, in turn, is because supply has failed to keep up with global demand as parts of the world have experienced unseasonable cold spells and economies have re-opened following Covid shutdowns.
Other factors are at play here as well. The UK’s arrays of wind turbines were left stationary for much of the summer because of calm conditions, reducing a valuable source of supply. And a critical electricity supply cable between France and England was put out of commission by a fire at a power station in Kent.
The UK also has less gas storage capacity than in previous years because of the closure of the Rough facility in the North Sea, making us more reliant on imports.
Our suppliers want to pass on these higher wholesale costs to us, their customers. But here in October 2021, their ability to do so is severely limited. First of all, 15 million households on standard variable rate ‘default’ and prepayment tariffs are protected by the price cap administered by Ofgem, the energy market regulator.
This rose by 12% on 1 October, taking average consumption bills to £1,277 a year for default tariffs (£1,309 for pre-pay). Those are big leaps that will take a huge bite out of household budgets over the coming months. But those wholesale prices have risen by almost 300% since January, so from the suppliers’ point of view, the 1 October cap increase is now looking woefully inadequate.
The second consideration is what is happening to non-default tariffs. For years the market was rich with 12-month fixed-rate deals that deeply undercut the price cap, so customers were encouraged to switch away from standard variable tariffs. But such is the cost of wholesale energy that suppliers can no longer afford to offer fixed tariffs for less than the level of the cap.
Anyone who is already on a fixed-rate deal is insulated from the price cap hike. But what happens when their deal comes to an end? Previously, the established routine was to switch from one fixed deal to another, precisely to avoid slipping onto a relatively expensive default tariff with the same supplier. But now defaults are the best available option. Much more expensive than the old fix, yes, but there really is nothing better on the market.
There’s another class of customer we need to bear in mind – those whose energy supplier has been crippled by market conditions to the extent that they have been forced to cease trading. Nine companies went to the wall in September, and more are expected to follow suit in the coming weeks and months.
Ofgem – the price cap people mentioned above – also maintains a safety net for customers of failed energy firms. This ensures power supplies are maintained and credit balances are honoured while the regulator finds another company to take on the bust supplier’s customer base.
All well and good – but customers on a fixed-rate tariff with a failed firm will find themselves on a default tariff with their new supplier, running at the level of the Ofgem cap. And that might mean an unavoidable £200 price hike.
A bit more on the cap. It changes every six months, on 1 April as well as 1 October. So what can we look forward to in 2022?
Let’s look at how Ofgem arrived at the 12% increase it has just implemented. This wasn’t a calculation on the back of a beer mat. As usual, it followed set procedures and made its calculations based on what happened in the wholesale markets between February and July and announced the results in early August.
That meant it could not factor in the dizzying price increases that rocked international bourses in August and September – hence the disparity between wholesale price reality and the new level of the cap (which is playing in favour of consumers, though it might not feel like it).
April 2022’s increase will be announced in February and will be based on wholesale prices in the period from last August to January next year. (Each new cap is revealed so far in advance because suppliers have to give customers 30 days’ notice of any price increase, and if the cap goes up, you can bet your shoes on a rainy day they’ll match it all the way.)
No-one is expecting wholesale prices to fall back any time soon by any meaningful degree. True, some of the supply challenges have improved – more natural gas imports into Europe from Russia, more reliable conditions for wind generation – but we’re entering the season of peak demand. Prices may level off, but Ofgem will still be juggling eye-popping numbers when it works out the next cap.
That means another leap in bills for pretty much anyone come April – only those clinging onto the dying days of a current fix will remain immune, but only until that fix runs out.
How much will the cap go up? As mentioned, the main cap for 11 million default tariff customers stands at £1,277 for average consumption households. Some reports suggest it might hit £1,500 or even £1,600 from April.
What seems certain is that the energy supplier market will continue to consolidate, and the number of companies will fall from around 50 to perhaps as few as a dozen. That could mean less competition and even less favourable conditions for consumers, although there are competitive markets with even fewer big players – take supermarkets, for example.
But it still looks grim for bill payers. There’s not much more to be done at present than to reduce energy consumption whenever and wherever possible, hope for a mild winter, and keep an eagle eye out for any competitive deals that emerge when wholesale price inflation eases.
I am the UK editor for Forbes Advisor. I have been writing about all aspects of household finance for over 30 years, aiming to provide information that will help readers make good choices with their money. The financial world can be complex and challenging, so I'm always striving to make it as accessible, manageable and rewarding as possible.