Light at the end of the tunnel?: Households will be better off on average £437 a year if typical annual energy bills fall
Energy bills are expected to fall sharply from July, which will bring relief to millions of households. Fixed-rate energy deals could also re-enter the market, which would help create competition and drive prices down further. But are prices likely to continue to fall – or will we have another harsh winter? And should you take out a fixed rate deal? Wealth & Personal Finance investigates.
What do I pay for energy?
UK households will be better off on average £437 a year as the typical annual energy bill drops from £2,500 currently to £2,063 from July, according to forecasts from an energy data specialist. The typical utility bill will fall from £208 a month to £172, Cornwall Insight predicts.
Wholesale prices have fallen thanks to a relatively mild winter and higher than expected European gas storage levels. Households in the UK and Europe have kept their energy consumption in check in recent months despite skyrocketing bills. This has led to reduced demand, which has contributed to lower prices.
Will I receive even more government aid?
For a few months now, household energy bills have been decoupled from wholesale costs. That’s because wholesale prices were so high that the government stepped in to protect households from paying the actual amount. If not, energy bills last winter would have exceeded £5,000 a year for the average household.
Now that wholesale prices are falling, these interventions will gradually be phased out. The Energy Price Guarantee (EPG) is one of the most important guarantees. This ensures that a typical bill until July is just £2,500 a year. The EPG will rise to £3,000 a year in July.
While this guarantee will increase, it is unlikely to lead to an increase in household bills. There is a second protection, the Energy Price Ceiling. The Energy Price Cap, set by the energy regulator Ofgem, limits how much suppliers can charge their customers.
At the moment the Energy Price Cap is £4,279 per year for an average household. Because the Energy Price Guarantee is currently even more generous than the Energy Price Cap, the Cap does not make a material difference to households’ bills.
But from July, the Energy Price Cap is expected to fall below the Energy Price Guarantee, to £2,063. This means that the Energy Price Guarantee will become superfluous and the Energy Price Ceiling will determine the level of household bills.
Remember that ultimately the amount you pay is determined by how much energy you use. If you use more than average, your bill will be higher than the bill of an average household.
What happens after July?
According to Cornwall Insight, there are many uncertainties after July and there is no guarantee that prices will continue to fall this year and next. Prices will be influenced by factors such as the war in Ukraine and the weather in Europe in the coming months. Unforeseen geopolitical events can quickly and drastically change wholesale energy prices. “While energy bills may be starting to stabilize, they are a long way from returning to pre-2020 levels,” said Dr Craig Lowrey, an analyst at Cornwall Insight.
“Although consumers feel more secure, we should not underestimate that these bills remain unaffordable for many households.”
Do you need to repair?
Fixed-rate energy deals may return to the market if wholesale prices begin to fall. With these deals, you can be locked into a fixed price per unit of energy for one or two years.
Energy suppliers stopped offering it last year when wholesale prices became very volatile.
They didn’t want to offer customers flat rates when they had no idea if wholesale prices would continue to rise, leaving them with customers paying below market rate.
However, as prices stabilize, firm deals may return.
Ovo Energy recently launched a flat rate of £2,275 for 12 months for the average household for existing gas and electricity customers. This is lower than the current Energy Price Guarantee.
Households that subscribe to a fixed rate that is below the Energy Price Cap and Energy Price Guarantee save money if wholesale prices remain stable or rise again.
However, they miss out on the chance to pin down at an even better rate if prices drop even further. Fixed rates often have high exit costs.
“If wholesale prices rise again later this year, a firm deal could end up being more beneficial, especially if it’s priced below the cap,” Richard Neudegg told comparison site Uswitch.
However, the opposite may be the case if wholesale prices fall further and the ceiling is lowered again during the specified term. Both options should be carefully considered.’
What other help is there?
You can get help if you’re struggling to pay your energy bill. Contact your carrier as soon as possible to see what support they can provide.
There are a number of schemes available from the government, municipalities, charities and energy suppliers. Citizens Advice has a good summary at citizensadvice.org.uk/energy.
Don’t forget accrued credit
Check whether you have credit with your energy supplier.
Credit is built when your direct debit payments are set at a higher level than you ultimately spend. You can reclaim credit at any time, but you should have the least credit at the beginning of May because we have just passed the most energy-intensive winter months.
So if you have a lot of credit, consider getting your money back.
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