UK energy regulator increases price cap by 80%

The typical UK household gas and electricity bill will rise to £3,549 a year from October from £1,971 at present, the sector’s regulator confirmed on Friday, as consumers grapple with a cost of living crisis driven by soaring energy costs.

Ofgem said the 80 per cent increase in the so-called price cap, which governs the maximum a household will pay for typical energy use from October, was due to the rise in wholesale gas and electricity prices caused by Russian restrictions on supplies to Europe

The latest industry forecasts suggest the price cap could rise to over £6,600 a year by the spring, a more than fivefold increase on the £1,277 price cap in October last year.

The UK government has faced growing calls for the next prime minister, who is due to take office early next month following the conclusion of the Conservative leadership campaign, to provide additional support for households to stave off a deep recession.

Foreign secretary Liz Truss and former chancellor Rishi Sunak the two candidates in the race, have been warned the crisis could extend for several years, since Russia has cut gas supplies to Europe in the aftermath of its invasion of Ukraine.

Jonathan Brearley, chief executive of Ofgem, said the £15bn in government support that was announced in May, which will provide £400 to every household and more to those on benefits, would no longer be enough. In May the price cap was forecast to reach about £2,800 a year by October.

“The government support package is delivering help right now, but it’s clear the new prime minister will need to act further to tackle the impact of the price rises that are coming in October and next year,” Brearley said.

“We are working with ministers, consumer groups and industry on a set of options for the incoming prime minister that will require urgent action. The response will need to match the scale of the crisis we have before us.”

The UK business department said it was making “appropriate preparations . . . to ensure that any additional support or commitments on cost of living can be delivered as quickly as possible when the new prime minister is in place”.

Chancellor Nadhim Zahawi, who was appointed by outgoing prime minister Boris Johnson last month, acknowledged the increase would cause “stress and anxiety for many people”.

“I am working flat out to develop options for further support,” he said. “This will mean the incoming prime minister can hit the ground running and deliver support to those who need it most, as soon as possible.”

Rachel Reeves, the shadow chancellor, said the latest figures would “strike fear in the heart of many families”, adding that the public deserved a government that could “meet the scale of this national emergency”.

Labour has said it would cap bills at the existing level below £2,000. It has suggested raising funding for such action by tightening offsets and discounts for oil and gas companies in the windfall tax that Sunak introduced in spring.

Cornwall Insight, an energy consultancy that has been one of the most accurate predictors of future price caps, said on Friday its latest forecasts showed an expected increase to £5,386.71 for the first quarter of next year. The cap will next be adjusted in January, since Ofgem now carries out reviews every three months rather than six.

By the second quarter of next year the price cap was expected to reach £6,616.37, Cornwall Insight said, before easing slightly to below £6,000 in the third and fourth quarters of next year. The consultancy warned that a significant overhaul of UK energy policy was required to deal with the long-term crisis.

“Today should be seen as a wake-up call to policymakers that short-term thinking and triage of the energy system is not enough,” the consultancy said. “Without real change to the energy system in this country it is consumers, suppliers and the economy that will all continue to suffer the consequences.”

The government is considering several proposals including one from Scottish Power, one of the largest UK energy retailers, which could involve price cuts for the majority of households, though no decision has yet been made.

The Scottish Power proposal is forecast to require funding of at least £100bn over the next two years, with costs spread over households bills for the next 10 to 15 years, absorbed into general taxation, or a combination of the two. That £100bn figure could rise, however, if wholesale energy costs keep going up.