Why are energy prices going up?

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With a record energy bill price hike on the cards for 2022, millions of households around the UK will be feeling the pinch over the next few months. From April, it’s said our energy bills could be as much as £1,925 a year. But why are energy prices going up and is there anything you can do about it? To help you prepare your finances for the months ahead, we’re running through what’s going on in the energy industry and how it affects you.

Why are energy prices going up?

In April, it is expected the energy price cap limit (the maximum amount energy suppliers are allowed to charge in Britain) will be raised to £1,925 per year.

This is because global wholesale prices have shot up due to increased demand and limited supply. A cold winter in Europe over 2020/21 kept demand high and a comparatively windless summer meant supplies weren’t replenished. Demand for gas has also risen across Asia.

The UK has been particularly affected because households here use a lot more natural gas. In fact, 85% of homes have gas central heating and much of our electricity is generated by it. We also have limited fuel storage facilities.

This global energy price increase has sent many UK energy companies out of business already. So, as suppliers are unable to absorb the rising costs, the energy regulator Ofgem is expected to raise the energy price cap, allowing suppliers to charge their customers more.

By how much are energy prices going up?

As you’ve probably noticed, energy prices already significantly increased this winter. This is because Ofgem already raised the energy price cap by £139 to £1,277 in October 2021. That month, around 15 million households saw their energy bills rise by 12%.

What’s more, when the smaller UK energy suppliers went bust this winter, around four million households were switched over to another supplier’s standard variable tariff. This tariff would generally have been more expensive than the tariff they were on before.

It’s said that in April 2022, energy prices could rise by as much as 50%, with a new energy price cap of £1,925. That works out at around a £600 a year energy bill increase.

Will energy prices come back down?

Industry experts don’t think energy bills will be coming back down in the near future. In fact, many believe that energy prices might shoot up yet again in October 2022. However, this isn’t certain. Ofgem review the energy price cap every six months, so the situation may have changed by the time of their next review. This means that energy prices could potentially fall if the price cap is lowered.

Who is affected by the energy price changes?

If you’re on a variable energy tariff or a prepaid energy meter, it is likely you will feel the effects of the energy price cap changes and see a rise in your energy bills.

If you are on a fixed energy tariff, the price of your energy bill should stay the same for the duration of your fixed price period. However, when your fixed price period ends, it is likely you’ll revert to your energy supplier’s standard variable tariff where you may see your energy prices shoot up. Keep an eye out for when this date is so you can be prepared for any significant price changes.

Should I fix my energy bill now?

Before the energy bill crisis, switching to a cheaper tariff could have saved households hundreds of pounds per year. However, with energy prices currently high across the board, switching isn’t as lucrative as it once was.

Currently, many of the ‘cheap’ fixed energy bill tariffs are actually at a higher rate than the upcoming energy price cap rise. This means it might not be beneficial to switch and fix right now. However, if you can find one that is less than the upcoming rise in prices, you might be better off fixing now before the higher prices come into effect.

What’s best for you really comes down to you and your circumstances. The potential worry about fixing now is that if prices come down in October 2022, you may be stuck at a higher price or have to pay early exit fees.

Are there any ways to reduce my energy bill?

If you can’t save money by switching to a cheaper energy tariff, you can try to shrink your bill by reducing the amount of energy you’re using.

Turning your thermostat down by just one degree can reduce the cost of your energy bill by 10%, which can be a big saving. The Energy Saving Trust recommends that you have your thermostat set at the lowest comfortable temperature. For most people that is between 18 and 21 degrees Celsius.

Here are a few more quick energy saving tips from the Energy Saving Trust:

  • Switch electrics off standby: save £45 per year
  • Avoid using the tumble dryer: save £40 per year
  • Reduce your shower to four minutes: save £45 per year
  • Draught-proof your home: save £30 per year
  • Switch off lights: save £14 per year
  • Don’t overfill the kettle: save £22 per year

Although small changes, these little savings can quickly add up and cut down the price of your energy bill.

Getting energy bill help

If you’re already frugal with your energy use and are worried about rising costs, there is more help out there. Here are a few schemes you can look into that might help with your energy costs.

  • Warm Home Discount Scheme – provides eligible households with £140 to put towards their energy bills
  • Winter Fuel Payments – an option for those who receive a state pension or a social security benefit. This offers between £100 to £300 to help with your fuel costs
  • Cold Weather Payments – available if the weather in your area is forecast or recorded to be at zero degrees Celsius or below for seven days in a row. You’ll receive £25 per seven days of low temperatures
  • Grants from your energy supplier or the British Gas Energy Trust – if you’re in debt to your energy supplier, you may be able to apply for a grant to help you pay off what you owe

Managing your other financial commitments

There are many households around the UK that will struggle to absorb the cost of rising energy bills. If you’re worried about making your existing credit repayments, act sooner rather than later to help keep your credit score protected.

If you’re currently making repayments on loans, credit cards or overdrafts, there are options you could consider to get a little more wiggle room in your monthly budget.

  • Consolidate your debts

If you’re currently paying off a credit product with a high APR, you may be able to save money by paying it off with a debt consolidation loan that has a lower APR. You could also consider spreading your existing repayments out over a longer term to reduce your monthly outgoings.

However, bear in mind that by extending the term of your debt, you’ll increase the total amount you repay.

  • Transfer a balance

With a 0% balance transfer card, you can transfer a credit card balance for a small fee and not pay interest on your card for the card’s 0% period.

This could give you the breathing space you need to chip away at your debt without it increasing. Just remember that you’ll still need to make the minimum monthly repayment and that once the 0% period ends, the card’s usual rate will apply.

  • Speak to your lender

If you don’t think there’s much you can do to avoid missing your next repayment, speak to your lender as soon as possible. You may be able to come to solution depending on the terms and conditions of your loan or mortgage. You’re in a much stronger position before you miss a repayment.

  • Seek free, impartial advice

If you’re really worried about money, you can seek free, impartial financial advice from a number of organisations and charities, such as Money Helper and StepChange. They’ll work with you to help you take back control of your finances and find a solution.

If you’d like to quickly and easily check your debt consolidation loan or credit card options without impacting your credit score, you can use our free eligibility checker.