With the energy price cap set to rise by 10% from October 1, 2024 to December 31, 2024, it’s crucial to understand how the upcoming rise in the energy price cap will impact your budget and whether it’s worth considering a fixed energy tariff now. In this article, we’ll delve into what the energy price cap is, why it’s increasing, and what you can do to mitigate the impact on your household finances. We’ll also offer some advice on how to decide if fixing your energy tariff is the right option for you.
What is the Energy Price Cap?
The energy price cap was introduced in 2019 by Ofgem, the UK’s energy regulator, to limit the amount energy suppliers can charge per unit of gas and electricity. The goal is to ensure consumers pay a fair price for their energy, especially for those on default or standard variable tariffs. This price cap is reviewed every three months and while it doesn’t set a strict limit on your overall energy bill, it caps the maximum cost per kilowatt hour (kWh) that energy providers can charge.
For clarity, the price cap applies to both electricity and gas. The total amount you pay is determined by how much energy you use, so even under the price cap, using more energy will result in higher bills.
Why is the Energy Price Cap Increasing?
The energy price cap is reviewed quarterly to reflect changes in the wholesale energy market. Unfortunately, the energy market has been incredibly volatile, particularly in the last few years. The cap is now set to rise again due to several factors, including:
- Global demand: The demand for energy has surged in recent years, driven partly by global economic recovery post-COVID and increased consumption across the world, especially in Asia.
- Supply chain issues: Gas supply challenges, including reduced pipeline capacity and geopolitical factors, have restricted energy supply, driving prices up.
- Environmental factors: Renewable energy sources, such as wind, have not always met expected production levels due to weather patterns, adding more pressure on gas and other traditional sources.
As a result, Ofgem’s latest review indicates that the price cap is set to rise, which means UK households on default tariffs could see a sharp increase in their energy bills.
How Will the Price Cap Increase Affect Households?
With the energy price cap set to rise, households will inevitably feel the pinch. For those on default or variable tariffs, the increase will directly affect their monthly bills. For example, under the current cap, the average household pays around £2,074 per year. With the new increase, some estimates suggest this could rise by as much as £300-£400 annually, depending on your location and usage.
Higher energy prices will be felt most acutely during the winter months, as heating costs typically rise with colder temperatures. This puts significant pressure on households already grappling with the cost-of-living crisis.
For renters, homeowners and landlords alike, energy efficiency becomes increasingly important. If you’re considering selling or renting out a property, highlighting energy-saving features could make a significant difference to prospective buyers or tenants. Homes with high energy efficiency ratings are becoming more desirable as they offer lower running costs.
Should You Fix Your Energy Tariff Now?
With the price cap on the rise, many are considering whether now is the time to lock into a fixed-rate energy tariff. Fixing your tariff means you agree to pay a set price per unit of energy for a specified period, usually between one and two years. However, while fixing can offer stability and peace of mind, it’s not always the cheaper option.
Pros of Fixing:
- Predictability: Fixed tariffs offer certainty over your energy bills. You won’t be subject to future increases in the price cap during your fixed period.
- Protection from further hikes: With energy prices likely to continue rising, locking in a fixed rate could save you money in the long term.
Cons of Fixing:
- Potential overpayment: If wholesale energy prices drop in the future, those on a fixed rate could end up paying more than if they had stayed on a variable tariff.
- Exit fees: Many fixed tariffs come with exit fees, making it expensive to switch to a cheaper deal if one becomes available.
Before making a decision, it’s essential to shop around and compare different tariffs. Websites like Uswitch and MoneySuperMarket allow you to compare fixed and variable tariffs, helping you make an informed decision. Remember, the cheapest option now may not necessarily be the cheapest in six months, so consider your financial stability and risk tolerance.
How to Reduce Your Energy Usage and Costs
Regardless of whether you choose a fixed or variable tariff, one of the most effective ways to mitigate the impact of rising energy prices is to reduce your energy consumption. Here are a few tips to help you lower your usage:
- Upgrade your insulation: Proper insulation can make a significant difference in your home’s energy efficiency. Insulating your loft and walls reduces the amount of heat escaping from your home, meaning your heating system won’t have to work as hard.
- Install a smart thermostat: Smart thermostats allow you to control your heating more effectively, ensuring you only heat your home when needed and reducing wastage.
- Switch to energy-efficient appliances: Replacing old, inefficient appliances with energy-efficient models can result in long-term savings on your electricity bills.
- Seal drafts: Drafts from doors, windows and chimneys can let cold air into your home. Sealing these gaps will help maintain a comfortable temperature inside your home without needing to constantly turn up the heating.
- Use energy-efficient lighting: LED bulbs use far less electricity than traditional incandescent bulbs and can last up to 25 times longer.
As the energy price cap continues to rise, it’s vital to take action now to protect yourself from soaring bills. Whether you decide to lock in a fixed tariff or stick with your current plan, the key is to stay informed. Compare the best deals available, consider your energy consumption, and explore ways to make your home more energy efficient.
