Energy price cap: Huge change coming this Friday – what it means for you

A row of terraced residential houses in north London. Chancellor Rishi Sunak has confirmed temporary plans to abolish stamp duty on properties up to 500,000 GBP in England and Northern Ireland as part of a package to dull the economic impact of the coronavirus. Picture date: Sunday July 12, 2020.
Energy bills are predicted to surpass £3,500 on Friday. (PA)

Ofgem will announce its new energy price cap on Friday, which will come into force from 1 October.

Experts predict the figure will surpass £3,500, meaning bills of almost £300 a month on average for a typical household.

The announcement is set to pile more financial misery on tens of millions of Brits the week after inflation hit 10.1% - its highest level in 40-years.

Energy bills have been a key driver of the deepening cost-of-living crisis.

Read more: Families in energy inefficient homes to pay £850 higher bills this winter

What is the energy price cap?

The energy price cap limits the amount energy providers can charge per unit to customers in order to prevent them being ripped off. It was introduced on 1 January 2019.

It applies to energy customers on default tariffs, and sets the price for around 22 million households.

Ofgem calculate the cap which varies depending on the wholesale cost of energy.

Since Russia's invasion of Ukraine, the price of wholesale gas has increased steeply.

UK inflation is at its highest level for decades. (ONS CPI)
UK inflation is at its highest level for decades. (ONS CPI)

How high is it now?

The current £1,971 price cap was announced in February, a £693 increase on the previous level.

It came into force on 1 April.

How high could it go?

Cornwall Insight on Monday said its modelling indicates the cap will reach £3,554 on Friday - and the outlook is gloomy for the months beyond.

Citigroup, the investment bank, say the cap will hit £4,567 in January and then £5,816 in April according to the Financial Times.

Read more: UK households to be paid to reduce energy use during peak times to avoid blackouts

Consultancy Auxilione has said that the cap is expected to reach £4,799 in January, hitting £6,089 in April.

In August, Western officials said energy prices will remain volatile until the end of the war in Ukraine.

"Only when this is the war ended can this dismal situation be overcome," they said.

Cornwall Insight is predicting energy prices could remain high into 2024, reducing in Q3 2023.

Energy bills are predicted to surge this winter. (Ofgem, Cornwall Insight predictions)
Energy bills are predicted to surge this winter. (Ofgem, Cornwall Insight predictions)

What does it mean for you?

Most households will see their energy bills go up significantly from October.

The increase in the energy price cap applies to default energy tariffs, regardless of if a customer pays by direct debit, standard credit, or a prepayment meter - around 22 million households.

The changes will cap the price for each kWh of electricity and gas used, but it does not cap a bill overall.

Households that do not benefit from the price cap include those on fixed tariffs or those that heat their homes using other sources of energy like heating oil.

What is the government going to do about it?

No 10 has said they will not announce a new strategy on energy bills until Boris Johnson's successor is elected.

It comes as experts warn approximately 45 million Brits will be in fuel poverty by January.

In May, former chancellor Rishi Sunak announced £15bn worth of financial support after Ofgem warned it predicted the price cap would hit £2,800 in autumn.

Among the measures included £400 energy bill rebate for every household, and £650 for Brits on means-tested benefits - but it has become rapidly out of date.

Read more: Energy boss compares rising bills to 'paying £25 for a pint of beer'

Tory leadership hopefuls Sunak and Liz Truss are under pressure to outline a strategy on energy bills, with Truss proposing tax cuts to tackle the crisis and Sunak proposing targeted financial support.

Experts have warned Truss, who is the bookies' favourite, that tax cuts will not help those on the lowest incomes - many of which do not earn enough to benefit or cannot work.

Labour has called for an emergency budget, and said the energy price cap should be frozen with the cost picked up by a windfall tax on energy companies.

Watch: Cost of living crisis: Families underestimating how much energy bills will rise, research shows