Will vitality payments rise or fall in 2025 and is it value taking out a set tariff?

Energy bills may have fallen from the record highs seen in 2021, but households are still paying an average of £1,717 a year for gas and electricity, with little relief on the horizon.

That £1,717 figure is the typical level of the Ofgem price cap, which sets energy bills for 27million homes – around 90 per cent of households in the country.

That rate applies to a home with average energy use, on a variable-rate energy tariff and paying by direct debit.

The immediate future of energy bills is upwards, as the price cap is set to increase in the new year.

But what is the future of energy bills throughout 2025, and when can hard-up households expect to see prices finally fall?

How much will energy bills rise in 2025?

The typical energy bill will rise by 1.2 per cent on 1 January to £1,738, according to regulator Ofgem.

That rate will last for three months, until the price cap is reset again in April and October.

Ofgem does not make predictions about the future of the price cap. However, experts at Cornwall Insight do.

Cornwall thinks the average bill will rise to £1,782 from April 2025, or 2.5 per cent.

Of this, £896.92 would go on electricity and £864.68 on gas, for typical use.

The April energy bill rise would reflect turbulence in energy markets and the extra cost of regulatory change to gas and electricity in the UK, Cornwall said.

Later in the year, Cornwall Insight thinks the price cap will ‘drop slightly in April 2025 and again in October 2025’, but has not published exact predictions.

Energy firm EDF believes the typical price-capped bill will rise to £1,754 in April, an increase of 1 per cent. 

Why are energy bills so high?

There is a complicated web of reasons why energy prices are so much higher than they once were.

The main culprit was the Russian invasion of Ukraine, which led to energy prices spiking. Russian supplies a large part of Europe’s gas, oil and coal, and concerns about availability sent prices rocketing.

While the UK did not import much fuel directly from Russia (around 4 per cent of gas use in 2021), it does import about 40 per cent of its energy.

The UK was then forced to buy this energy on the open market against competitor countries, driving the price up for everyone.

The high cost of buying wholesale energy then led dozens of UK energy firms to collapse. These firms were forced to sell energy to consumers at far less than it cost them to buy it, thanks to most homes having fixed-rate energy bills.

Not only did new fixed-rate energy deals entirely vanish, but the cost of all the failed energy companies was factored in to all energy bills.

Since then, regulation by Ofgem has also played a part in keeping bills high. This includes a ban on energy firms undercutting each other on price and delaying smart meter reforms.

The cost of electricity is also pushed up by a pricing system called ‘marginal pricing’, that often sees the cost of all power charged at the higher cost of gas rather than the cheaper cost of renewable energy.

The way electricity works in the UK is like a market. At the start of the day, all electricity providers – renewable energy, nuclear and gas – work out how much it will cost them to produce a single unit of electricity. This resetting then happens every half an hour.

Those estimates are then matched to consumer demand, and the sources with the cheapest prices are told to start generating electricty first.

In practice, that normally means renewable energy like wind and solar power goes first, then nuclear, then gas. That is because renewable energy is far cheaper to generate, provided the sun shines and wind blows.

The problem with marginal pricing is that if any gas is used, then all wholesale electricity sold is priced at the higher rate of gas, regardless of how much it cost to generate or how much gas is being used to generate electricity.

Even if only 5 per cent of the UK’s electricity comes from gas power stations at any given moment, the price of that gas is used to set the wholesale price for the remaining 95 per cent of electricity.

When electricity companies then buy that wholesale power and sell it to consumers, this is one of the things that inflates the final cost – and the price of consumer electricity bills.

When will energy bills fall?

Energy bills are unlikely to go back to historic norms for years, Cornwall Insight thinks – perhaps until the end of the decade.

The firm thinks energy prices will not change much until 2027/28, and will then start to fall off, due to more renewable energy being rolled out.

Can I take out a fixed rate energy deal and save money?

Households may be able to beat the cap and save money by taking out a fixed-rate energy deal.

At the moment, most energy deals are variable. That means they change price, normally four times a year when Ofgem adjusts its price cap.

Fixed rates, as the name suggests, offer set prices for unit rates (the energy used) and standing charges (daily fees paid regardless of any energy used).

Before the energy crisis of 2021, most energy deals were fixed rate, with variable rates reserved for homes that had fallen off a fixed deal and not taken out a new one.

But fixed rate deals have made something of a comeback, and if you can find one cheaper than the price cap then you can save money on your energy bills.

Not all households will be eligible for a fixed rate deal, and the exact price paid will vary on energy usage.

Additionally, many cheaper fixed rate energy deals are not available on the open market and are offered to customers directly by their energy firm.

Energy firms are free to sell these fixes to their own customers only, without disclosing these rates to the wider world.

If your energy firm contacts you about an exclusive fixed rate, check how it compares in price to what you pay now and what you’d pay in January when the price cap changes.