It is hard to still be taken by surprise where rising energy prices are concerned but if you thought there is only so much energy prices can rise, this week has been a nasty shock. But the good news is that there are things you can do to reduce your bill.
The energy price cap, the maximum price per kilowatt hour (kWH) energy providers can charge you for gas and electricity- is predicted to hit £5,000 next year.
But the term “price cap” is a misnomer, as in reality, prices can be much higher – it depends on how much energy you use.
The dire prediction, made based on Wednesday’s energy prices by energy consultancy Auxilione who are forecasting that the UK’s energy regulator, Ofgem, could be compelled to set the cap as high as £5,038 in the three months beginning next April.
The forecast is even higher than a prediction from earlier this week that energy bills would hit £4,467 in January.
If those gloomy forecasts are realised, it will mean the average UK household will spend more than £570 a month on electricity and gas next January.
“Today the UK government has called energy companies in to try and find a way to bring down prices,” Auxioline said.
“It seems there is little appreciation just how impossible that task is and neither have control over this in such a globally-influenced market,” the consultancy added.
Currently the energy price cap is £1,971 a year, which is already a 54% increase on this time last year. With the price cap predicted to rise to £3,582 in October for the average household.
Ofgem also confirmed last week the price cap will be updated every three months from October instead of every three months under the current systems.
Should you fix your tariff?
Before the current crisis, the best way to save money was getting a one or two year fixed energy tariff. But now that wisdom has been completely turned on its head.
For most of us our energy company’s standard variable tariff is as cheap as it gets because of the price cap - for now.
But with a price rise looming in October, will opting for a fixed-rate deal protect you?
We’ve crunched the numbers to work out that if you can get a fixed rate no more than 65% higher than what you currently pay, it's worth considering - assuming the October price rise prediction turns out to be correct.
But make no mistake, you will be paying more for energy than you do right now should you opt for the deal. The gamble is that you’ll be paying less from October when the next energy price cap rise is expected.
Guy Anker, director at personal finance website, the Money Edit, says: “Fixing isn’t for everyone, so think carefully before you make your decision. It’s all about your attitude to risk and only you can make the decision. Whatever you choose, you are gambling to some extent as there are no certainties in this period of wild economic and political whirlwind.”
“Ultimately it depends on your attitude to risk. If you do fix it, you need to be aware that it is a bit of a gamble.”
If you are already on a fixed rate tariff, the best strategy may be to stay put and do nothing.
Although MoneySaving Expert’s Martin Lewis points out, there are no deals cheaper than price-capped standard tariffs, though there are some fixed deals that could be worth considering.
But those deals are rarely available for long.
Why are price caps changing so often anyway?
Energy prices have exploded in value in the UK and globally for a host of reasons. Demand for energy plummeted during the pandemic as lockdowns curtailed economic activity. But demand for energy has rocketed throughout the world after pandemic restrictions were largely eased. Russia’s invasion of Ukraine worsened energy prices considerably.
While the UK isn't overly dependent on Russia for natural gas, Europe is heavily reliant because it used to import 40% of its gas from Russia and 29% of its oil from Russia.
What are other ways to reduce my energy bill?
There are many other things you can do to save on your energy bill, other than switching to a cost-effective fixed-rate tariff. It is probably not so obvious but setting up a direct debit is one of the simplest ways to reduce your energy bill. Not only does it help you to never miss a payment it also reduces your bill by around 7%, compared to other methods of payment.
You can also do other things like reduce your shower time and switch off appliances that you aren’t using. We explain this in our sister publication The Money Edit’s article on 17 hacks to cut energy costs.
What support is available from the government on energy bills?
Under the energy bill discount, almost every single household in Britain will benefit from a £400 discount, expected to be paid from October and does not need to be paid back. Meanwhile those on disabilities, low incomes and pensions, could receive as much as £1,500, read The Money Edit’s piece to find out more.