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What is the energy price cap and why are gas and electric bills rising again in October 2022 by another £800?



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Energy bills are set to rocket by another £800 from October - according to the latest gloomy predictions about the UK's escalating cost of living crisis.

The warning - which one fuel poverty charity says is striking 'terror into the hearts of millions of people' - is connected to a second planned increase in the energy price cap.

Gas and electric bills have already suffered one significant cost rise this year - leaping by between £600 and £700 just last month for the average household on a standard variable tariff.

Energy bills are set to rise again in October. Picture: Andrew Matthews/PA.
Energy bills are set to rise again in October. Picture: Andrew Matthews/PA.

A second astronomical rise, warns charities, will leave millions of homes facing fuel poverty and struggling to heat their homes by the winter.

But why are bills facing a second increase in 2022 and what help is there likely to be available?

People with average bills are facing another £800 rise. Image: iStock.
People with average bills are facing another £800 rise. Image: iStock.

What is the energy price cap?

The price cap was introduced at the start of 2019 by regulator Ofgem, with the aim of preventing households on traditionally more expensive standard tariffs from being over charged for the energy they were using.

The energy price cap, which is overseen and set by Ofgem, now controls the amount suppliers can charge customers for their energy by placing a maximum limit on gas and electric charges. It applies to people either on a default standard variable energy tariff or those using pre-pay metres, which is estimated to be around three fifths of all households combined.

The price cap is assessed twice each year - first in April and again in October - which can lead to bills coming up or down.

The war in Ukraine is contributing to a volatile energy market. Picture: Efrem Lukatsky/AP.
The war in Ukraine is contributing to a volatile energy market. Picture: Efrem Lukatsky/AP.

Why are bills rising?

Because of rising wholesale energy costs, more recently fuelled by the war in Ukraine, and to help providers cope with missed customer payments caused by the pandemic, Ofgem allowed the price cap in April to rise by around 54%.

This pushed the average cost of an annual bill up by roughly £693 a year for the average sized household - the highest price rise in about 10 years - taking yearly bills for those standard households paying by direct debit to £1,971 up from £1,277.

Some 23 million households are currently estimated to have their bills controlled by the price cap.

But energy markets remain volatile. Russia's invasion of Ukraine continues, placing greater uncertainty on markets, while wholesale gas prices continue to rise, remain unpredictable and at times have been 10 times their normal level.

This has prompted Ofgem to warn people that it will most likely be forced again in October to raise the price cap, and subsequently bills, when it looks at charges for the second time this year.

People on standard tariffs paying by direct debit face a further rise in October to their bills. Image: iStock.
People on standard tariffs paying by direct debit face a further rise in October to their bills. Image: iStock.

How much might bills be in October?

Ofgem said on Tuesday that it expects the price cap to increase to something in the region of £2,800 by October.

For average sized households, with average sized gas and electric bills paying by direct debit, this could mean an extra £800-£900 being added to bills annually and would leave homes needing to find around an extra £60 to £70 a month to meet the additional charges.

The increase expected in October won't affect those who at that time will be locked into a fixed-rate tariff, where the price they are paying for energy is fixed for a certain number of months or years. But since April's price rise fewer good fixed-rate deals have been available to customers meaning that more and more people are steadily finding themselves on their supplier's variable rate and now open to October's second price rise.

Ofgem chief executive Jonathan Brearley has described the current situation as a 'once in a generation event' that perhaps has not been seen since the oil crisis of the 1970s. But charities say that will provide little comfort to people struggling to manage their constantly rising outgoings.

Households in council tax bands A to D have been given £150
Households in council tax bands A to D have been given £150

What help is available?

The government has so far brought forward two new policies for the majority of households this year, on top of existing grants and Warm Home help, to try and help people manage their escalating gas and electric bills and ease the pressure on outgoings.

Last month district, borough and city councils began giving households in council tax bands A to D a £150 council tax rebate, following an instruction by Downing Street. The lump sum does not need to be paid back.

Chancellor Rishi Sunak said he hoped this would help people cover some of April's price cap rise - albeit many charities said the £150 people were being given would not touch the sides of an increase totalling close to £700 annually for most homes, combined with a second increase in October already on the horizon.

Later this year people are also expected to receive a £200 energy rebate - or loan - which will appear as a £200 credit on their bill account this autumn.

Although unlike April's £150 council tax rebate, this £200 will eventually have to be paid back under the current plans, beginning in April 2023 with the first £40 instalment, by which time it is hoped that bills could begin to drop again in price. Critics of the scheme however say there are some downsides to the way it is likely to be administered - including that those who don't take the initial £200 loan because, for example, they may live at home with parents or in a shared house but who at a later date move out, will have to pay back the £40 instalments due to be applied to all bills nationwide from next year to claw back the money given out, even if they didn't benefit from the initial £200.

There is also no option to opt-out for those who would prefer to not take the loan and just swallow this year's increases as best they can.

Chancellor Rishi Sunak is under pressure to do more to help people
Chancellor Rishi Sunak is under pressure to do more to help people

Is more help coming?

This week's announcement by Ofgem that the price cap is likely to top £2,800 a year by the end of 2022, and add another £800 to people's bills when food, petrol and other outgoings are also still rising, has put the government under more pressure.

Charities are warning that millions more homes will be placed into fuel stress this winter if more isn't done to try and bring down the cost of people's bills.

Fuel stress is defined as spending at least a tenth of a household's budget solely on energy bills, and if October's bill increase plays out as predicted the numbers facing fuel stress could rise from five million families to 9.6 million, warn campaigners and opposition ministers.

It is expected that the government could put forward a further package of measures to try and ease the cost-of-living crisis, which could be unveiled as soon as tomorrow (Thursday) by Chancellor Rishi Sunak.