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Energy price cap: Who will be hit hardest?

EMBARGOED TO 0001 WEDNESDAY FEBRUARY 2 File photo dated 21/10/2021 of Rishi Sunak. The Government must do more to prioritise economic crime and explain why legislation is being delayed, according to an influential group of MPs. Issue date: Wednesday February 2, 2022.
Households are facing a record increase to their energy bills after the energy price cap was hiked by 54%. (PA Images)

Millions of Brits will see their energy bills rise by nearly £700 a year to an average of £1,971 after regulator Ofgem increased the energy price cap by 54% on Thursday.

Around 22 million households are currently on a deal linked to the energy price cap, with many now facing significant financial stress due to the increase, which kicks in from April.

The cap protects consumers from being overcharged for their energy.

However, the wholesale price of gas has spiked markedly in recent months, meaning energy companies have been making massive losses and more than two dozen have gone bust since September.

Read more: Martin Lewis' plea to Rishi Sunak ahead of hideous energy price hike - 'Help is needed'

Ofgem's decision to increase the cap is designed to stop more companies failing in the future - but it is going to hit consumers hard.

Yahoo News UK looks at who will be worst affected and why.

Who suffers the most?

The increase in the cap will hit households on lower incomes hardest. This is largely because they spend a higher proportion of their income on energy and are more sensitive to fluctuating prices.

Even within low-income groups, certain demographics will be hit harder than others.

Working-age single Brits on a low-income face the toughest rises by a significant margin. This demographic spends around 33% of their income (not including housing costs such as rent or mortgages) on energy bills.

Proportion of income after housing costs spend on energy bills
Proportion of income after housing costs spend on energy bills

In contrast, a person in the same position on a middle income will spend 5% of their income on energy.

Working-age single parents in low incomes will also be some of the worst hit. This group spends15% of their income (after housing costs) on energy bills compared to 4% for those on middle incomes.

A growing number of experts, such as money saving expert Martin Lewis, have warned that soaring prices will leave more vulnerable households having to choose between "heating and eating" in 2022.

Read more: Cost of living: Three key dates that will affect the cash in your pocket

The Resolution Foundation has said the coming months could be "catastrophic" for millions, describing it as "the year of the squeeze".

According to the Joseph Rowntree Foundation (JRF), this will have a "devastating" impact on families on the lowest incomes.

Watch: Energy price cap rises: Millions face average £693 bill hike - but Sunak offers £350 help

“Rising energy prices will affect everyone, but our analysis shows they have the potential to devastate the budgets of families on the lowest incomes," a JRF spokesperson said.

"The government cannot stand by and allow the rising cost of living to knock people off their feet.”

How the energy price cap affects your bills

Gas and electricity prices are closely linked to the energy price cap, and any increase will push up the average bill.

Read more: Households will be 'devastated' overnight by soaring energy bills

The chart below shows a clear link between the price cap going up and the knock-on impact on consumers.

Last October, for example, fuel costs rose considerably following a 12% rise energy price cap, which resulted in consumer prices for gas and electricity rising by 17.1% and 8.7%.

gas and electricity inflation
Gas and electricity inflation has a direct impact on consumers. (PA Images)

Cost-of-living crisis

The cost of living crisis was laid bare on Thursday as the Chancellor Rishi Sunak was forced to step in to offset a nearly £700 spike in energy bills, while the Bank of England warned inflation would hit its highest point in more than three decades.

Energy bills are set to soar by 54% for 22 million households from the beginning of April, adding £693 to the annual bills of a typical household to a record £1,971. For customers with prepayment meters the price cap will go up by £708 to £2,017.

Meanwhile, inflation is set to hit an eye-watering 7.25% in April, according to new Bank of England forecasts released on Thursday.

The chart below highlights the scale of a problem that is only getting worse.

the cost-of-living in the UK is rising fast
the cost-of-living in the UK is rising fast

In response, Sunak announced to the Commons a £200 rebate on energy bills, which will have to be paid back, a £150 reduction in council tax for millions in England, which will not have to be paid back, and £144 million funding to councils.

Some MPs questioned whether oil companies like Shell, which increased its profits 14-fold in part thanks to rising gas prices, should be hit with a windfall tax.

Labour MP Nick Smith said: “Does he (the Chancellor) really think that the super profits of 20 billion dollars made by Shell are untouchable? His hands-off approach won’t persuade many people across our country.”

Shadow chancellor Rachel Reeves said millions of people are cutting back spending to pay bills, adding: “What do the Government offer? A buy now, pay later scheme that loads up costs for tomorrow.

“The best way of targeting support to those who need it most would be an increase to £400 and an extension to 9 million households of the warm homes discount, as Labour has proposed today. Their scheme today is a pale imitation of Labour’s, especially for the households and pensioners on the most modest incomes,” she added.

The government’s plans to help households cope with soaring energy bills was branded “woefully inadequate” by fuel poverty charity National Energy Action.

Watch: Energy crisis: What is the price cap and why will bills rise so sharply?