The average household’s energy bill will rise to the highest level in three years following Ofgem’s new price cap announcement. (Alamy)
4 min read28 August
Ofgem announced this week that the energy price cap would increase to the highest level in three years as the war in Iran continues to drive up energy prices in the UK.
The energy regulator said the cap, which determines the maximum amount that a supplier can charge a consumer for energy per year, would rise by 4 per cent from £1,663 to £1,723 between October and December. Energy analysts Cornwall Insights have also predicted that the cap will reach around £1,872.15 in January-March.
Energy Secretary Miatta Fahnbulleh said “families will be understandably concerned” about the cost of energy “which is being driven up by the Iran war”.
“Energy is an everyday essential, and it needs to be affordable for everyone, which is why we have cut VAT on electricity bills from October to give families some breathing space,” she said.
“This has limited the rise in the price cap and follows the £150 in costs we removed from bills earlier this year, and we will keep looking at what more we can do to protect families from unaffordable bills.”
Prime Minister Andy Burnham announced a cut to VAT on household energy bills when he entered No 10 in July. The step, which was part of a wider cost-of-living package, was projected to remove around £45 a year from the average household bill.
However, the savings face being swallowed by higher prices, raising questions of what more the Labour government can do to support households with their bills.
Why are energy bills increasing?
Energy prices had started to stabilise following their 2022 peak triggered by Russia’s invasion of Ukraine. Around half of Europe’s natural gas came from Russia, meaning a breakdown in relations with Moscow led to a sharp fall in supply and a steep rise in global prices.
However, the decision by the US and Israel to attack Iran at the start of this year and resulting conflict has led to further disruption in the international energy markets.
Around 20 per cent of the world’s natural gas passes through the Strait of Hormuz, a vital shipping lane controlled by Iran and which Tehran has effectively shut down as a way of putting pressure on the Donald Trump administration. Iran is also responsible for a large portion of the world’s oil supply.
Responding to the cap rise announcement on Wednesday, Dr Craig Lowrey, principal consultant at Cornwall Insight, said: “What is frustrating is these rises, as we have seen time and again, have very little to do with what is happening in Britain.”
What further action could the government take?
The Budget on 28 October will be a key event for the question of further support.
In terms of what steps Chancellor John Healey might take in his first fiscal event since entering the Treasury, PoliticsHome understands he could roll out plans developed by the Keir Starmer government to expand eligibility for the Warm Homes Discount.
The Warm Homes Discount was introduced in 2011 by the coalition government to help low-income households with energy bills during the winter months through a one-off £150 annual discount.
PoliticsHome understands that it could be expanded to include more households facing cost-of-living pressures, such as recipients of Personal Independent Payments, and described as ‘Warm Homes Plus’.
The End Fuel Poverty coalition told PoliticsHome that while an expansion of the Warm Homes Discount would be welcome, the £150 discount is now worth significantly less than when it was introduced over a decade ago due to energy bill inflation. It is now estimated to cover 9 per cent of the average bill, compared with 14 per cent when it was first rolled out.
PoliticsHome also understands the government has shown interest in a Resolution Foundation idea to use HMRC data to target support at households earning below a certain threshold. The think tank has said that the scheme would provide an additional £175 to eligible households on average a year, costing the government £2bn.
Adam Berman, director of policy and advocacy at Energy UK, told PoliticsHome that “too many households continue to struggle with high energy bills” in the UK.
He added: “It’s imperative that the government introduces more targeted support for low-income households alongside bringing down electricity bills for everyone.”
With the first Budget of the Burnham government two months away, and the next price cap period not until early next year, further action on energy bills is not expected until after 28 October, when households will be preparing for the coldest period of the year.