The price cap rose by 12 per cent last October to £1,277 but had been £1,042 at the same time the previous year and may exceed £2,000 later this year.
Ahead of the increase, here’s what it means and what you can expect from the rise.
What time is the announcement?
Ofgem is expected to announce the next cap on Thursday, February 3, at 11am.
The price is based on the average wholesale gas price over the previous six months leading up to the announcement date.
What is the energy price cap?
The price cap was introduced on January 1, 2019 by Ofgem to provide protection to customers across the UK.
Ofgem introduced the cap to limit the unit rate and standing price energy suppliers could charge for their default rate across England, Wales and Scotland.
The price tariff is also based on wholesale energy prices, meaning suppliers aren’t buying energy at a more expensive rate than they’re selling.
The rate is set and reviewed in February and August each year and comes into effect in October and April.
Why is it going to rise?
The cap is set to rise due to increasing wholesale gas prices which have surged since last summer, with industry group Oil & Gas UK reporting prices have increased by 250 per cent since the start of 2021.
Europe experienced a prolonged and colder winter which depleted gas reserves across the continent and caused demand to increase.
The UK’s wind farms also failed to fill the energy gap due to slow wind speeds during last summer, which were some of the least windy months since 1961.
China, which is the world’s largest consumer of energy, also saw an increased demand with market experts, S&P Global Platts reporting demand rose by 8.4 percent in 2021 in comparison with 2020.
While European countries have scrambled to import more gas from Russia, Gazprom – the country’s largest energy supplier – refused to increase flows to the continent.
This particularly affected the UK as just one per cent of Europe’s stored gas is held here and although Britain is a big producer of gas with 438,520 GWh a year, Norway still exports 266,155 GWh to help sustain our consumption.
Due to these circumstances, 23 energy supplies have gone bust in the UK, the biggest being Bulb which had 1.7 million customers.
What does this mean for your bills?
Martin Young, an energy industry expert analyst at Investec, predicted the limit will be increased to £1,924 in the spring.
That will increase household bills by almost 50 per cent from April, Cornwall Insights claims, but the energy tariff could rise again to £2,054 in October.
“Without significant changes to the way we procure, supply, and consume energy, we are likely to see many years of boom-and-bust energy pricing in the UK,” Tom Edwards at Cornwall Insight said.
“Our overreliance on imported energy will also leave us vulnerable to variable pricing, with supply chain disruptions, geopolitical tensions and economic shifts, all having the potential to spill over into our market.”
Rishi Sunak has been urged to cut VAT from energy bills which currently stands at five per cent in order to help families across the UK.
According to The Times, Mr Sunak and the Prime Minister have agreed to a rebate scheme which will allow suppliers to access £6billion in loans.
Companies will pass on this money in the form of a £200 rebate for every household which will be paid back by customers over the next few years as prices fall.
This comes as inflation currently stands at 5.4 per cent in the 12 months leading to December – the highest since 1992.
In April, National Insurance rates are also set to rise by 1.25p more on the pound, which will see an employee on £20,000 a year pay an extra £89 in tax.
For those on £50,000, this will mean an additional £464 more.