Energy payments will rise by 10 per cent – what it means for you

Energy bills will rise 10 per cent in October, regulator Ofgem has confirmed – or £149 more a year.

The average home currently pays energy bills of £1,568 a year, with prices limited by the Ofgem price cap.

But this will rise to £1,717 from 1 October, Ofgem said on Friday.

Rising energy bills are a blow to hundreds of thousands of pensioners, who will no longer get Winter Fuel Payments worth up to £300 a year due to chancellor Rachel Reeves’ sweeping cutbacks.

Here is how the changing Ofgem price cap will affect you and your energy bills.

Why are energy bills rising? 

Energy bills are rising because of the increasing cost of wholesale energy – the gas and electricity bought by energy firms that then sell onto consumers.

What is the Ofgem price cap? 

The current price cap sets the energy bills paid by more than 80 per cent of UK homes, though the exact amount varies depending on gas and electricity use.

It does this by capping how much gas and electricity firms can charge those on variable tariffs. In practice, most firms with these tariffs charge the maximum they can, so the level of price-capped unit rates and standing charges is what consumers end up paying. 

The headline price cap figure applies to households on variable-rate tariff energy deals paying by direct debit, using an average amount of energy.

However, exactly how much you pay will depend on your deal, energy use and where in the country you live. 

How is the price cap changing? 

Both the unit rate cap and the daily standing charge cap will rise on 1 October.

The average electricity unit rate will rise from 22.36p per kilowatt-hour (kWh) to 24.5p per kWh, with gas rising from 5.48p to 6.24p.

Standing charges are paid regardless of how much gas and electricity is used.

For electricity the typical charge will rise from 60.12p a day to 60.99p. For gas, the increase is from 31.41p to 31.66p.

The October average price cap will run for three months until it is reset again in January 2025.

Can I beat the price cap rise?

The only way to pay less in energy bills is to use less gas and electricity or move to a cheaper deal.

The only deals cheaper than those limited by the Ofgem price cap are fixed-rate deals, which were once the most common energy deal.

However, competitive fixed-rate deals mostly vanished after energy prices began rising in 2021. 

The price cap was brought in during January 2019 to stop energy firms overcharging customers on variable-rate tariffs. 

When will cheap fixed-rate energy deals return?

Fortunately there are some fixed-rate deals that beat the October price cap by up to £125 a year, but these are rare.

A fixed-rate energy deal, as the name suggests, restricts unit rates and standing charges regardless of what happens with the Ofgem price cap.

If a fixed rate is cheaper than the one likely to come in in October – though many are not – then households will save money on their energy bills.

This can be worked out by looking at the price of the unit rates and standing charges you are being charged now, versus what a fixed rate would offer from 1 October.

Uswitch director of regulation Richard Neudegg said: ‘The news of a 10 per cent rise in energy rates from October is a harsh reminder of how quickly the energy market can reverse course.

‘The good news is, households don’t have to put up with the uncertainty of rising bills, as right now there are fixed deals available that are cheaper than the new price cap.

‘The cheapest 12 month fixed tariff, for the average household, is currently £1,592, representing a £125 annualised saving against October’s price cap, and offers protection against another potential rise in January.’

Some fixed rates are only offered by an energy firm to its existing customers, and cannot be found on the open market.

Where did cheap fixed-rate energy deals go?

Before 2021 most households had fixed-rate energy deals, and only moved onto variable-rate tariffs if they did not renew at the end of their term.

But after energy bills began rising in late 2021, gas and electricity companies responded by pulling all new fixed-rate deals from the market.

They did this to try to avoid the widespread collapse that affected many energy firms, which were suddenly being forced to sell power for far less than it cost them to buy it.

Because cheap fixed-rate deals had almost disappeared, almost all homes ended up on variable tariffs regulated by the Ofgem price cap.

Energy firms are also restricted from bringing back competitive fixed-rate deals by regulation.

Ofgem rules mean energy firms cannot offer cheaper deals to new customers, unless they also offer them to existing ones too.

Ofgem brought in this ‘ban on acquisition-only tariffs’, or BAT, in October 2022 to stop energy firms from using the classic tactic of undercutting one another to sign up new customers as prices soared.

The BAT is part of the reason that energy bills are still so high for the typical home – the level of the Ofgem price cap – as firms have no incentive to bring back cheaper deals.

Ofgem said earlier this month it will keep this ban until 31 March 2025 at least – a U-turn on its earlier position to scrap it in October 2024.

The only positive news is that customers who stay with their energy firm won’t be penalised with higher bills.

What happens to energy bills in 2025?

Ofgem never makes predictions about the future of its price cap.

But sadly, it looks like the only way is up.

Analysts at Cornwall Insight said there would be a ‘further modest increase’ to energy bills when the price cap changes again in January 2025.

Cornwall Insight has correctly predicted the direction of all price cap changes since energy prices became volatile in late 2021.