Energy price cap explained: Why your energy bills may increase to £2,000 next year

Martin Lewis warns of 'damaging' energy price cap rise

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Gas prices surged to 450p per therm on Wednesday, an unrivalled all-time high for the product. The price strain has significantly impacted providers, and more than a dozen have folded in recent months. Steep operating costs for surviving firms may drift to consumers, who analysts believe may end up saddled with an increasing burden.

What is the energy price cap?

The Office of Gas and Electricity Markets (OFGEM) calculates the energy price cap to protect consumers from predatory bills.

In action, it limits the amount a supplier can charge for their default tariffs, covering both standing charges and kWh for electricity and gas.

At present, the cap set by OFGEM is £1,277 per year. This total will rise and fall as it responds to underlying supply costs over the seasons.

Consumers benefit from lower bills when gas prices descend but end up paying more again when they recover.

The cap also shifts with customer distribution, which has oscillated wildly this year.

Dozens of firms have shut their doors due to the unrelenting pressure, meaning other carriers have had to take on their customer base.

Any bills and levies left unpaid by the collapsing firms may also drift to their former competitors.

Ultimately, they will have to lean harder on their customers to help make up the deficit.

OFGEM may decide to raise the energy cap in April 2022, using a “significant” increase to prevent more companies from going bust.

Some have blamed the cap in its current form for their recent woes, stating it prevented them from raising prices to meet demand.

Analysts believe the developing crisis will leave people paying more than 50 percent of what they do currently.

Investec, a joint UK-South African financial services firm, forecast a potential surge of £723. That would take bills from £1,277 up to £2,000.

Britons would ultimately paying an additional £60 per month to their providers.

Mr Martin told the Times the change would come “a shock to many”.

He added they could come with “implications for discretionary spend, inflation and fuel poverty”.

But ministers have an opportunity to cushion that blow when it eventually lands.

Martin Young, a senior analyst at Investec, said nearly half of the increase comes from Government-controlled variables.

Factors such as levies and taxes make up £300 of the revised total.

If deemed necessary, actions like axing energy bill VAT or migrating green energy levies could provide some relief.

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