The energy price cap — the maximum amount that suppliers in Great Britain can charge consumers — is reviewed every six months by Ofgem, the energy regulator. The last hike, in October 2021, saw prices rise by 12 percent — now, however, households are facing a rise of as much as 54 percent.
This latest hike, announced by Ofgem today, will come as a major shock for millions of households already facing a squeeze on the cost of living.
The rate paid will differ slightly depending on whether you’re on a standard or prepaid tariff.
Standard tariffs will see a rise of £693 per year, bringing the average annual bill to £1,971, while prepayment customers will see an increase of £708 to £2,107 per year.
Chancellor of the Exchequer Rishi Sunak will address the nation later on Thursday as he unveils measures designed to support the lowest earners.
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So where does the money you pay for your household energy bills actually go each month?
According to Ofgem: “Energy bills are made up of a number of costs. They’re not just the gas and electricity you use.”
The costs are divided into six categories: wholesale costs, network costs, social and environmental obligations, “other direct costs”, supplier operating costs and margin, and taxes like VAT.
Wholesale costs — the money you’re actually spending on gas and electricity — makes up the biggest slice of the pie, accounting for more than 34 percent of your bill on average.
The fifth slice of the pie goes to taxes, particularly VAT — currently, the standard VAT rate in the UK is five percent against home energy, and this is reflected in your bill.
The last chunk of cash goes toward “other direct costs”.
These include the costs of direct debit administration and any other allowances approved by the regulator, and will be dependent on your specific contract.
These figures will differ slightly if you have a dual fuel bill or pay for gas and electricity separately, as you can see in the chart below.
Why are bills going up?
The biggest driving factor behind the huge increase is the global cost of wholesale gas — the most expensive part of your bill.
A worldwide squeeze on gas and energy — caused by cold winters, a lack of wind for alternative energy sources and an increase in demand from Asia — has contributed to the issue.
There are a number of technical and geopolitical issues at play as well, which mean many countries across Europe are grappling with the same problems.
However, the UK is relatively hard-hit because it is one of Europe’s biggest users of natural gas.
Around 85 percent of homes have gas central heating, and it also generates a third of the country’s electricity.