Domestic energy prices

Summary

Wholesale energy prices increased rapidly from the second half of 2021 and much of 2022. Many consumers were protected, at least initially, by the energy price cap. However, the price cap increased by 54% in April 2022 and Ofgem planned to increase it by a further 80% on 1 October 2022.

On 8 September the then Prime Minister Liz Truss announced that a new Energy Price Guarantee (EPG) would instead be introduced from 1 October. This was set at £2,500 a year for typical levels of consumption at the time and was initially planned to last two years.

After a change of Prime Minister and Chancellor the new Chancellor of the Exchequer announced on 17 October 2022 that the EPG would now only last sixth months ending at the end of March 2023.

In the Autumn Statement 2022 the Chancellor announced that the EPG would be extended a further year from April 2023, but would increase in April 2023 from £2,500 to £3,000, again for typical annual consumption at the time.

On the morning of Budget 2023 the Chancellor announced that the EPG would remain at £2,500 for an additional three month to the end of June 2023. It would then increase as planned to £3,000 from July 2023 to March 2024.

The Energy Price Guarantee was lower than the levels the price cap would have been in Q4 2022, Q1 2023 and Q2 2023. However, it still meant average prices increases of 27% in October 2022.

The monthly increases in both gas and electricity prices in April 2022 alone were by far the largest ever recorded on a series going back to 1988. The annual increases to October 2022 were also the largest ever recorded on a series going back to 1970.

At the end of May 2023 Ofgem announced that the price cap for Q3 2023 would fall to £2,074 for typical annual consumption at the time. This took it below the EPG level. As maximum prices are set by the lower of the cap or EPG it meant that prices fell in July for customers on standard variable tariffs.

The price cap has fallen in three of the four subsequent quarters. These falls are smaller than the increases in 2021 and 2022 so the quarterly cap from July 2024 will be still be around £350 or 29% above their summer 2021 levels.

The price cap is forecast to rise by 10% in October 2024 and remain around this level for the rest of winter 2024/25. With little prospect of savings from fixed tariffs or a return to pre ‘energy crisis’ prices, the only way to substantially reduce energy bills, while still adequately heating/powering homes, is to improve the energy efficiency of properties.

Revised Typical Domestic Consumption Values

Ofgem has introduced new lower Typical Domestic Consumption Values (TDCVs) for all its relevant publications from October 2023. This takes the assumed typical level of gas consumption down from 12,000 kWh per households per year to 11,500 kWh and typical electricity consumption down from 2,900 kWh to 2,700kWh.

This change makes an average bill for typical consumption look lower, even if prices per unit of energy are unchanged. The data on energy trends in section 3.1 of this briefing is not affected by this change. Ofgem data on price trends in different sections of the market in sections 3.2 and 4.1.switches to the new TDCVs from October 2023 so has a break in their series.

The sections of this paper dealing with the price cap use the new lower TDCVs throughout. Those looking at the Energy Price Guarantee use both the current and the old TDCVs as the £2,500 and £3,000 levels were prominent in discussion of energy prices. The £2,500 EPG level between October 2022 and June 2023 is equivalent to £2,3800 with the new lower TDCVs. The £3,000 EPG level from July 2023 to March 2024 would have likely been £2,850 and £2,860 with the new lower TDCVs.

Trends in prices up to 2021

Gas prices were stable or falling for much of the period from 2013 to 2020. They started to increase towards the end of 2021. The average bill for 2021 was £564 compared with almost £700 in 2014.

Electricity prices increased for much of the last decade. Average bills were £769 in 2021 compared to £450 in 2010, a 36% real increase.

Prices in 2022 and beyond

The energy price cap increased by 12% in October 2021, 54% in April 2022 and was due to increase by 80% in October 2022 (gas by 91%, electricity by 70%). The April increase was equivalent to £700 more across a year for direct debit customers with ‘typical’ levels of dual fuel consumption at the time for. The October cap would have been an increase of almost £1,600.

The Energy Price Guarantee (EPG) meant that prices people paid for gas and electricity from 1 October 2022 were less than under the original Q4 2022 cap and the subsequent caps for Q1 and Q2 2023. At £2,500 for typical annual consumption levels up to June 2023, it was still 27% above the summer 2022 cap. Gas was 37% higher than in summer 2022, electricity 17% higher.

Households also received the £400 Energy Bills Support Scheme (EBSS) in monthly instalments between October 2022 and March 2023.

The rapid increase in prices in late 2021 led suppliers to withdraw cheaper fixed price tariffs. The large majority of households (29 million) are now on Standard Variable Tariffs (SVTs) which are controlled by the EPG.

The EPG was due to increase to £3,000 in April 2023, but the Government put this increase back to July 2023. Falling wholesale prices led Ofgem to reduce the price cap for Q3 2023 to £2,074 for typical annual consumption at the time. This meant that maximum prices for customers on SVTs fell for the first time in almost three years. There was a further 7% cut in the price cap in Q4 2023. The Q1 2024 cap increased by 5%, the Q2 2024 cap fell will fall by 12%. The EPG remains in place until March 2024 but will not be used again as these caps are below its level.

The latest forecasts show the price cap for typical consumption increasing by around £160 (10%) in Q4 2024 and remain at this higher level in early 2025. These forecasts are still highly uncertain at this stage. The briefing Gas and electricity prices during the ‘energy crisis’ and beyond looks in more detail at prospects for prices.

Variations in prices

Customers who pay by direct debit have traditionally been offered the cheapest tariffs. The gap between payment methods has fallen over time, especially after 2017 when a price cap on prepayment meters was introduced. Since July 2023 the Government has paid for a lower cap for customers on prepayment meters, removing the ‘prepayment premium’ with direct debit customers. Those paying by standard credit (quarterly bills) still pay more under the cap.

There is some difference in energy prices across Great Britain. Combined gas and electricity bills for standard levels of consumption varied in 2023 from £2,466 in the East Midlands to £2,691 in North Wales & Merseyside. Annual direct debit bills under the price cap Q1 2024 for (lower) typical levels of consumption vary by region from £1,888 in the East Midlands to £1,991 in North Wales & Merseyside.

In the second half of 2023 UK domestic electricity prices were higher than in any EU country. Gas prices in the UK were 20% below the EU average. UK consumer prices for gas and electricity increased at a much faster rate than the EU average in 2022. Price falls in the UK in 2023 happened later than in most of the rest of Europe.

Customers not covered by the cap or Energy Price Guarantee

There is no price cap on non-domestic energy so increases in business energy bills could be larger still, affecting the economic viability of some and feeding through to higher consumer prices in general. The Government announcement on the Energy Price Guarantee said that there would be “equivalent support” for businesses and other non-domestic consumers.

On 21 September it announced that households not on the gas grid and using heating oil or other fuels would receive a payment of £100. This was increased to £200 in the Autumn Statement. The Government has also said that there would be equivalent support for households not on standard gas/electricity contracts such as those living in park homes or on heat networks. The Government also released details of its support for non‑domestic consumers, the Energy Bill Relief Scheme, on 21 September.

Households in Northern Ireland were not protected by the price cap or Energy Price Guarantee. The Government announced its plans for support for households in Northern Ireland on 21 September. This includes support equivalent to the Energy Price Guarantee which will be introduced in November bills and backdated to October. There was also a £600 payment to all households in Northern Ireland to help with energy bills in winter 2022/23. This was made up of the £400 Energy Bills Support Scheme plus the £200 Alternative Fuel Payment.

Crude oil prices jumped when Russia launched its full-scale invasion of Ukraine on 24 February 2022 and continued to increase through early March. These increases quickly fed through to heating oil prices.

Average monthly heating oil prices increased from just over 20 pence a litre at the start of the first lockdown to 99 pence a litre in mid-June 2022. They have fallen for much of the time since then and were 58pence per litre in mid-June2024.

What support did the Government offer households in 2022-23?

The Energy Price Guarantee (see above) is the main method the Government has used to support households. There has also been a number of different schemes offering direct support.  

In February 2022 the Government announced a package of support to help households with rising energy bills,

The package included a £200 upfront discount on bills in October 2022 (paid for by customers in £40 instalments over the following five years), a £150 Council Tax rebate for around 80% of households in England, £144 million in discretionary funding for local authorities and £715 million for the devolved administrations.

On 26 May 2022, when the October cap was forecast to be around £2,800, the Chancellor announced a further package of measures intended to help with the cost of living, including higher energy bills, in 2022‑23. This included:

• Doubling the upfront discount on bills to £400 for all households and scrapping the requirement for it to be repaid.
• A £650 one-off payment to around 8million households on certain means tested benefits
• A £150 one-off disability cost of living payment for people who receive certain disability benefits
• A one-off £300 payment for over 8million pensioner households
• An additional £500 million of local support through the Household Support Fund.

Households could receive multiple elements of this package if they are eligible. The total value of this additional support in 2022-23 was estimated at £15.3 billion. The gross cost is £21.3 billion as it converts £6.0 billion of earlier support from a loan to a grant.

This extra spending will be partly supported by a new windfall tax, the Energy Profits Levy, which the Government expects to raise £5 billion in its first year. The briefing Energy Bills Support Scheme: Government policy and FAQs gives more details.

Why did energy prices increase so much?

Prior to Russia’s full-scale invasion of Ukraine in February 2022 there was an increase in demand for oil and gas as economies around the world came out of lockdown. Supply did not keep pace with the higher demand for various reasons. Increased gas prices fed through to increased electricity prices.

The Russian invasion of Ukraine in 2022 caused oil and gas prices to jump due to concerns about disruption to supply. Sanctions on Russia, the embargo on Russian oil, a potential embargo on Russian gas and cuts in Russian gas supply to Europe have pushed oil and gas prices up further still. The price of electricity produced form gas has increased in line with gas prices and effectively sets the price for all power on wholesale markets. Lower electricity production in some sectors have also helped to push up power prices. Drought in parts of Europe led to lower hydroelectric output and a large number of French Nuclear reactors were offline in late summer.

Wholesale gas and electricity prices on the spot market fell in autumn 2022 to levels below those at the start of the year. There was a spike in prices during early December 2022, but prices fell back in early 2023 and have remained at levels well below their 2022 peak, but still above their pre ‘energy crisis’ levels. The operation of the price cap and EPG meant there was a substantial time lag before wholesale price falls lead to lower household bills.

Components of a typical energy bill

The July to September 2024 price cap consists of:

• 39% wholesale costs of energy
• 23% network costs
• 14% operating costs
• 12% policy costs (levies to support low carbon generation, energy efficiency and vulnerable customers)
• 5% VAT
• 5% assumed suppliers (profit) margin
• 4% other costs.

In the first half of 2023 all of the ‘big five’ energy suppliers (which had reported) saw substantial increase in their profits.

Further information

Readers may be interested in the following related briefing papers from the House of Commons Library:

• Gas and electricity prices during the ‘energy crisis’ and beyond
• Households off the gas-grid and prices for alternative fuels
• Energy efficiency of UK homes
• Why is cheap renewable electricity so expensive?
• Constituency casework: Government support for energy bills
• Rising cost of living in the UK
• Fuel Poverty in the UK
• Local area data: fuel poverty
• Constituency data: Central heating, 2021 census
• Constituency data: Households off the gas grid
• Constituency data: Energy efficiency

The following pages include the most useful official data on energy prices:

• Domestic energy price statistics (DESNZ)
• Retail market indicators (Ofgem)
• Wholesale market indicators (Ofgem)