Families may be enjoying lower energy bills while the sun shines, but will still be facing stubbornly high costs to heat their home this winter, even after the new energy price cap kicks in next month.
The cost of power has fallen by nearly 50% in the past year, while the average consumer energy bill has risen 26% in that time, prompting many to take to social media to ask why the drop has not been carried over to help in the cost of living crisis.
Last month, regulator Ofgem set the new energy price cap at £2,074 from July 1, a decrease of £1,204 on the £3,280 cap active from April 1. However, no one pays that as the typical home currently pays £2,500 a year under the Government's Energy Price Guarantee scheme, which limits how much households pay.
Read more: Warning that prepay energy customers need to act soon to get new price cap prices
So why are energy bills not going down when wholesale gas prices are falling? And why will we be paying nearly as much this winter as last, despite a drop in the energy price cap?
Based on the difference between the current Energy Price Guarantee (EPG) of £2,500 and the new price cap of £2,074 for direct debit customers, the average household should save £426 a year, or around £36 per month, from July. But the reality is that most families will save just a few pounds a month because the £400 Energy Bills Support Scheme (EBSS), which subsidised bills from October-March, has come to an end, with no sign of a repeat for winter 2023.
The next price cap will be announced in August and kick in on October 1, and assuming predictions are accurate, the average household will continue to pay almost double the rate for their gas and electricity than before costs started to soar in late 2021. Before then, the typical household paid £1,271 a year. although the actual saving depends on how much energy you use, as the price cap is a cap on the tariff you pay, not your actual bill. Use more than the average household and you'll pay - and save - more.
Since coming out of the pandemic demand for gas has gone through the roof, but supply struggled to catch up. It sent prices soaring and pushed up the cost of gas and electricity for both households and businesses. This has been compounded by Russia's invasion of Ukraine which has led to a squeeze on gas supplies across Europe.
Ofgem chief executive Jonathan Brearley said the lowering of the Ofgem price cap from April "reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won't make an immediate difference to consumers, it's a sign that some of the immense pressure we've seen in the energy markets over the last 18 months may be starting to ease".
He added: 'However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of Government support that is currently in place, this is a very tough time for many households across Britain."
There are several reasons why energy bills are staying high despite falling wholesale prices, but here's the three main ones:
1. Wholesale prices may be falling, but they are still high
Even after the recent falls, wholesale prices are double where they are historically, according to Robert Buckley, head of relationship development at energy analysts Cornwall Insight.
"That has taken us down from six times normal pricing to double normal pricing," he told This Is Money, but pointed out that energy bills would have averaged £4,279 over the winter were it not for the EPG capping bills at £2,500.
2. Energy firms buy power long before it is needed
While energy bills are based on wholesale prices, they're not real time prices. This is because wholesale energy costs fluctuate a lot and energy firms 'hedge' by buying gas and electricity well ahead of when it is needed to get around that. They can do this months and even years ahead, so our current monthly bills do not reflect today's prices, but rather the wholesale cost from when the supplier first paid for the energy. In practice, it means energy prices to consumers can be slow to fall when wholesale prices do, although it also works the other way when wholesale prices rise.
3. The cost of power is only a proportion of the bill
The cost of the actual gas and electricity only makes up around a third to two-thirds of bills. The rest is made up of fixed prices to pay for things like:
- The cost of running energy firms including sending bills and customer service.
- Installing power lines and paying for fitting and running gas pipes and electricity cables
- Covering the cost of energy firms that have failed
- Environmental and social obligation costs such as Warm Home Discount and the smart meter rollout.
- VAT at 5 per cent.
Now read:
- Energy bills could rise £30 for households to cover cost of customers who avoid paying
- Little-known way to slash your water bills by up to 50% a year
- Experts warn of cost pitfalls if you fix your energy prices too soon
- Warning as families face bills to replace broken smart meter displays
- Save more than £100 by changing the way you pay your energy bill
