Household energy bills will soar by £693 per year from the beginning of April, energy regulator Ofgem has confirmed as the Government stepped in with help for households.
The regulator was forced to hike the energy price cap to a record £1,971 for a typical household as gas prices soared to unprecedented highs.
For customers with prepayment meters the price cap will go up by £708 to £2,017, the regulator added.
The decision is likely to impact 22 million households across Great Britain, and applies to those who are on their energy supplier’s default tariff.
Shortly after the announcement, Chancellor Rishi Sunak promised to “take the sting out” of the price rises.
He promised that all 28 million households in Britain would get a £200 up-front rebate on their energy bills from October.
The Government will provide the cash for this, but it wants the money back so will hike bills by £40 per year over the next five years from 2023 to recoup its cash.
If all goes to plan, wholesale energy prices will drop so households can pay back what they owe, without a major rise in bills.
Some energy company insiders worry that while good in principle, the policy is too reliant on falls in global gas prices.
But experts are not sure this will happen, at least not soon, Goldman Sachs has already warned that prices in the gas market are likely to remain at twice their usual levels until 2025.
Mr Sunak also promised a £150 council tax rebate for homes in bands A to D, something he said would cover around 80% of homes in England.
He also promised £144 million to councils to support vulnerable people.
“The price cap has meant that the impact of soaring gas prices has so far fallen predominantly on energy companies,” the Chancellor told MPs on Thursday.
“So much so that some suppliers who couldn’t afford to meet those extra costs have gone out of business as a result.
“It is not sustainable to keep holding the price of energy artificially low.
📣The government’s energy price cap is changing and this could affect you.— Ofgem (@ofgem) February 3, 2022
Record global gas price increases mean the energy cap will rise by £693 for customers on their supplier’s standard default tariff from 1 April.
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“For me to stand here and pretend we don’t have to adjust to paying higher prices would be wrong and dishonest.
“But what we can do is take the sting out of a significant price shock for millions of families by making sure that the increase in prices is smaller initially and spread over a longer period.”
Ofgem chief executive Jonathan Brearley said: “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.
“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices – a once in a 30-year event – and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.”
We’re providing up to £350 per household this year through the #EnergyBillsRebate to help people deal with rising energy bills.— HM Treasury (@hmtreasury) February 3, 2022
Chancellor @rishisunak explains what this support will look like and how it will benefit UK households. pic.twitter.com/undypLutyK
The price cap increase includes a £68 charge per household to cover the costs of protecting millions of customers whose energy suppliers collapsed in recent months.
The announcement was made shortly before Chancellor Rishi Sunak was set to detail help for households to deal with the massive spike in energy prices.
The Government has for weeks been assessing what it can do to help customers. Potential solutions have included loans to energy companies and cuts in VAT or levies on energy bills.
However, as late as Wednesday night, some of Britain’s biggest energy suppliers had not been told what the Chancellor would announce.
Ofgem also plans to on Friday set out new rules which will allow it to change the energy price cap in between its regular six-month reviews.
🙋A question we often hear is “what is the price cap?”— Ofgem (@ofgem) January 25, 2022
While we don't increase or decrease the price of energy, we calculate the level of the government's #EnergyPriceCap that applies to default energy tariffs.
This may affect you. See how it works📺 https://t.co/7SyVaj2ogq pic.twitter.com/4wqpvMDGpl
The regulator pledged the power will only be used in exceptional circumstances, and five tests will have to be passed before it can step in.
The price cap had already been set at a record high in October before the worst of the gas price spike had been seen in the market.
The latest rise had been largely expected by experts and companies, although the details were still to be confirmed.
Cornwall Insight, an analysis outfit, said on Wednesday that it thought the price cap would be £1,915 per household.
There are also worries about next winter, when experts predict bills could spike to as much as £2,329.
The price cap change was originally planned to be announced next Monday, but in a surprise move Ofgem moved it forward without explaining why.