Ofgem has announced that it is increasing the energy price cap by 54%, rising from £1,278 to £1,971. That means consumers in the UK will see their energy bills skyrocket over the coming months.
The increase in the summer price cap was long anticipated, with the industry struggling under the price cap due to skyrocketing prices in the wholesale market. This has led to many utility firms going bust and a rapidly increasing cost of living for UK households.
Unfortunately, the latest increase in the price cap is unlikely to stem the bleeding for consumers or the industry. The UK Government has announced short-term measures to help mitigate the increase, with both the industry and consumers set to get additional. However, its intervention is unlikely to have much of an impact.
According to Dr Craig Lowrey, Senior Consultant at Cornwall Insight, “With the wholesale gas and electricity market remaining incredibly volatile, it was unfortunately inevitable that the Default Tariff Cap would be raised to what is an historic level. As forecast by Cornwall Insight prior to this announcement, a typical customer is now likely to see over £600 a year on top of what, for many, were already high energy bills.
“Given the extent of the increase, the immediate focus of the government and Ofgem must be to shield customers, and the wider economy, from the impact of this rise. There are a number of avenues that can be explored through the tax and benefit system, whether this be direct financial support such as increasing the warm homes discount, a suspension of VAT or deferring network costs, amongst other options, all of which will make a temporary dent in the payments.
“Mitigating the effect of this rise is however not a viable long-term solution, and without changes, we predict the winter cap will see payments rise to over £2,000 a year for the average customer. Furthermore, any tools intended to reduce the immediate impact of these record high prices will mean that they are ultimately borne over a longer period.
“Throughout this period of volatility in the markets, one that currently shows no signs of abating, the government and Ofgem have been steadfast in their belief that the Default Tariff Cap is the correct mechanism to protect customers from higher bills. However, the cap was never meant to be a permanent solution and today has shown that rather than protecting customers, the impact in the wholesale market over the last 12 months was simply deferred, leading to this significant increase announced today.
“Where we go from here is a matter of debate, and solutions such as increasing energy storage, rebalancing our import and home-grown energy usage and looking at low carbon policies to lower our vulnerability to fossil fuel prices are all areas that need exploring further. Ultimately what has become clear is if we continue to only play with our outdated system, consumers, suppliers and the wider economy will all pay the price.”