What households can do to cope with Ofgem’s 80% energy price cap increase

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments:

“Ofgem’s decision to raise the energy price cap to £3,549 is extremely worrying news for households who now face a giant leap in their monthly bills from October 1. Talking about a potential jump in the energy price cap is one thing, but having it confirmed is another. And while the 80% change is truly alarming, with the warmer temperatures still clinging on it may still be difficult for some people to absorb the true scale of the challenge ahead.

“There’s no doubt the massive hike in energy prices will be the biggest blow yet in Britain's all-encompassing cost-of-living crisis. Households are already paying far more to fill up their cars with petrol and their supermarket trolleys with food than they were a year ago and the eye-wateringly high energy bills to heat their homes will be the tipping point for many.

“With the prospect of energy bills jumping up again from January 1 when the price cap is next updated, energy arrears are expected to soar at a time when around eight million households are already on the brink of fuel poverty, according to figures from National Energy Action.

“The financially fortunate might be able to absorb rising bills in the months ahead, particularly with the aid of the Government’s £400 support payment, but those on low incomes will face very stark choices between eating and heating even after the more generous support packages for the most vulnerable have been factored in.

“This puts even more pressure on the two contenders looking to lead the country, Liz Truss and Rishi Sunak, to deliver effective measures to help struggling households cope over the winter months.”

“As well as Government intervention, households should consider ways to reduce their own expenditure as well as their energy consumption to protect their finances in the months ahead. Strategies could include taking an axe to the household budget and slashing all unnecessary spending to build up a financial buffer. But with many already trimming luxuries and forgoing holidays in preparation, there may not be much more they can trim back on.

“It might also be time to think along more practical levels, such as investing in warming aids for the home such as cosy blankets, hot water bottles, fake fur lined slippers, thermal underwear and warm clothing that can be layered up.

“Even simple measures such as closing curtains at night to act as an extra level of insulation to help keep the heat in, moving your furniture so that it does not block the heat coming out of the radiator and making your own sausage dog draft excluders for doors, windows or cracks in the floor can help. Blocking up an unused chimney, putting rugs on wooden or tiled floors are other simple heat retaining measures. This is the time to think smart about keeping heat in the home with every DIY tactic worth a shot.

“As well retaining heat, households should strive to reduce their energy usage where they can. Air drying clothes rather than using a tumble dryer, taking shorter showers and turning off lights and appliances not in use are all simple tactics that can help to cut costs.

“For those lucky enough to have extra funds available, installing solar electricity panels on the roof will provide a stream of homemade energy, with any excess power sold back to an energy supplier. Other options include taking advantage of government grants to install an air source heat pump, which can be cheaper to run than an old, inefficient gas boiler, or upgrading the insulation in your home and replacing old kitchen appliances with more energy efficient models.

“Separately, National Grid is reportedly poised to announce a new scheme in early September to encourage customers to stop using energy-hungry appliances such as washing machines, tumble dryers, ovens and gaming devices between 5pm and 8pm. While the full details are yet to be released, the scheme is likely to apply to homes with smart meters installed with any savings made paid back to customers.

“While the 80% rise in the energy cap is distressing, remember that a price cap is there to protect consumers. Every three months the regulator calculates how much it costs on average for a supplier to get energy to you. The cap then sets the maximum price that suppliers can charge households on a standard variable tariff for each unit of energy they consume. It does this by calculating how much a household paying by direct debit using the average amount of energy must pay over a year.

“Once this figure is decided, Ofgem revises the cap level to ensure a fair price to protect against overcharging. While that sounds great when costs fall as the cap ensures suppliers are passing on the savings, it’s not so great if costs rise as suppliers will also have to pass on some of the price rises – which is why the UK is in the situation it is now.

“The only silver lining is that without the cap, the situation could be even worse as suppliers could look to pass on even more of the costs. The cap was introduced in January 2019 to prevent households on expensive variable tariffs from being ripped off, However, while the cap is designed to offer peace of mind that any price rise is justified – as the level leaps upwards, it is becoming an increasingly is a difficult pill to swallow in these constrained times.

“It is also wise to remember the price cap is not a cap on the maximum bill a household can be charged as what you pay depends on your usage. This means that those using more energy than average will pay higher bills and those using less will pay less, so not everyone is looking at the same bills.

“Ironically, aside from homes that are partially or fully sustainable, other households likely to feel some relief in these dark times are those that use oil-fired boilers to heat their homes. With oil prices dipping in recent weeks, average home heating oil has dropped in price to 90.88 pence per litre, as of August 23, compared to almost 170 pence in March. But prices are still double what they were a year ago and volatility is still very much a feature in global oil markets.

“So, while there is little you can do about the price you pay for energy, as the volatility in the energy markets is a direct impact of Russia’s war with Ukraine, there is plenty you can do to cut down your usage. As well as surge in prices, there is also likely to be a surge in DIY hacks as households get savvy about retaining heat in their homes.”