Energy prices for millions of households across England, Wales, and Scotland are set to reach their highest level in three years, following an announcement from regulator Ofgem.
Ofgem confirmed that its energy price cap will increase by 4% from October 1st. This rise is attributed primarily to higher wholesale gas prices, a consequence of the ongoing conflict in Iran.
For a household using a typical amount of gas and electricity, the increase will mean an additional cost of approximately £60 per year, or £5 per month. The new cap will push the average annual bill for a dual-fuel household to £1,723, if sustained at this level for a full year.
Around 22 million households, operating on standard variable tariffs, will be directly affected by the change. However, approximately 35% of households – equating to 11 million – are on fixed tariffs, meaning their prices will remain unchanged for the duration of their contracts.
The announcement comes as colder weather approaches, intensifying concerns about household budgets already strained by cost of living pressures.
Prime Minister Andy Burnham acknowledged that the increase would be "difficult" for many but highlighted the government's recent cut to VAT on electricity bills, which he stated would save households £45 and provide assistance from October. He affirmed the government's commitment to "continue to look... at how we get energy prices down in the long term."
In addition to the VAT reduction, the government also pointed to the Warm Home Discount scheme, which is set to provide £150 off bills for six million eligible households this winter.
However, opposition parties and energy analysts have voiced significant concerns. Analysts at energy consultancy Cornwall Insight have forecasted a further potential 9% rise in domestic energy prices in the new year, which would bring renewed financial pressure during the coldest months.
Shadow energy secretary Claire Coutinho criticised the government, stating it must "put cheap energy first." She highlighted that while the government had previously promised to cut bills by £300, they had "gone up by nearly £400 instead." Liberal Democrat spokesperson for energy and net zero, Pippa Heylings, urged Prime Minister Burnham to "wake up to the scale of the challenge" and implement "bold changes" to lower bills.
Former Prime Minister Gordon Brown also contributed to the debate, suggesting the government introduce a "machine gaming tax" to fund support for those struggling with bills. Long-term, he advocated for a social tariff for energy, expressing confidence that Andy Burnham "will want to do something along the lines I'm suggesting."
Neil Kenward, Ofgem's director general for markets, clarified that while gas bills are set to rise by 8%, electricity bills are actually falling slightly due to the government's VAT cut. He also noted that the widening gap between gas and electricity costs could incentivise households to transition to heat pumps, presenting a potentially cheaper option over time. Kenward added that "savings are available by choosing a fixed tariff, which are available at £100 or more below the October price cap." He also confirmed that the price cap rise was technically 3.6% but rounded up to 4% for public communication.
Ofgem's price cap mechanism sets a maximum price per unit of gas and electricity, meaning a household's final bill remains dependent on their actual energy usage. In July, Ofgem revised its estimate of "typical" energy use downwards to 9,500 kWh of gas and 2,500 kWh of electricity per year, reflecting improvements in energy efficiency and households' efforts to reduce consumption due to high prices in recent years.
The underlying driver for the price cap increase is wholesale costs, which constitute over a third of a typical domestic dual-fuel energy bill. Energy UK, the trade body for suppliers, reported that the average price of gas has been 61% higher over the past three months. Industry data indicates that average household bills are still approximately 70% higher than before Russia's full-scale invasion of Ukraine in 2022, which triggered the ongoing energy crisis.
This sustained period of high prices has led to a significant increase in energy debt. Energy UK estimates total collective debt to have reached £6 billion, with projections suggesting it could rise to £7 billion by the end of the year. The trade body has called for a flexible discounted tariff for vulnerable households, funded by taxation, a proposal supported by numerous debt charities.
Vanessa Northam, director at debt charity StepChange, highlighted that many people seeking help are burdened by substantial energy debt, averaging £2,600 on top of other financial commitments. StepChange has also joined calls for the government to introduce a social tariff.
For those anticipating difficulties with winter bills, Ms Northam offered practical advice: households should take stock of all income and outgoings, closely monitor energy usage, and be wary of a series of estimated bills which may be inaccurate. Crucially, she advised telling suppliers immediately if a household expects to struggle with payments, as companies can often only provide assistance once they are aware of the situation. Energy suppliers offer various support schemes, and resources are available online, though personalised advice is often most effective.
