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 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 for ‘typical’ annual consumption.

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. 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 will fall again in October 2023 to £1,923. Despite this, annual bills for typical consumption under the cap will still be almost £800 or 69% above their summer 2021 levels.

The price cap is forecast to remain close to its Q4 2023 level over the following year. With little immediate prospect of savings from fixed tariffs or further cuts in the price cap, the only way to substantially reduce energy bills, while still adequately heating and powering homes, is to improve the energy efficiency of properties.

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 the year 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 ‘typical’ levels of dual fuel consumption paid by direct debit. 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. This meant that maximum prices for customers on SVTs fell for the first time in almost three years. There will be a further cut in the price cap in Q4 2023 to £1,923. The EPG remains in place until March 2024 but would only set maximum prices again if the cap increased to more than £3,000.

The latest forecasts show the price cap for typical consumption increasing to just over £2,000 in Q1 2024 and remaining between £1,900 and £2,000 for the rest of the year. These are still highly uncertain at this stage. The briefing Gas and electricity prices under the Energy Price Guarantee 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 relatively little difference in energy prices across Great Britain. Combined gas and electricity bills for standard levels of consumption varied in 2022 from £2,162 in the North East to £2,330 in North Wales & Merseyside. Annual direct debit bills for typical levels of consumption under the Q3 2023 price cap vary by region from £2,030 in the East Midlands to £2,139 in North Wales & Merseyside.

In the second half of 2022 UK domestic gas prices were above those in most of the EU, while UK electricity prices were higher than all but one EU country. UK consumer prices for gas and electricity increased at a much faster rate than the EU average in both the first and second half of 2022. Price falls in the UK in 2023 have, so far, been smaller 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 will also be a £600 payment to all households in Northern Ireland to help with energy bills in winter 2022/23. This is 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 fell back to 53 pence per litre in May 2023 before increasing again to 69 pence per litre in August 2023.

What support did the Government offering 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 couldreceive 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 have energy prices increased 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.

How will price rises affect lower income households?

Spending on energy varies less by income than any other spending category. This means lower income households have to spend a much larger share of their family budgets on energy than higher income groups. Recent sharp increases in energy prices will have a disproportionate impact on lower income households.

The April 2022 price cap and Energy Price Guarantee level from October suggest that it would cost the poorest 20% of households an additional £1,000-1,100, and pensioner households around an additional £1,400, to use as much energy in financial year 2022-23 as they did in 2020‑21. This is before the extra support the Government has announced is taken into account.

Components of a typical energy bill

The October to December 2023 price cap will consist of:

• 49% wholesale costs of energy
• 21% network costs
• 11% operating costs
• 9% policy costs (levies to support low carbon generation, energy efficiency and vulnerable customers)
• 5% VAT
• 3% assumed suppliers (profit) margin
• 3% other costs.

Further information

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

• Gas and electricity prices under the Energy Price Guarantee and beyond
• Introduction to the domestic energy market
• Constituency casework: Government support for energy bills
• Energy Prices Bill 2022-23
• Energy bills and the price cap
• Energy Bills Support Scheme: Government policy and FAQs
• Rising cost of living in the UK
• Imports of energy from Russia
• Fuel Poverty in the UK
• Local area data: fuel poverty
• Constituency data: Central heating, 2021 census
• Constituency data: Households off the gas grid
• Oil prices
• Petrol and diesel prices
• Energy price rises and the Energy Bills Rebate.

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)