Millions of E.ON customers will have their energy bills increased by 10% from April, after the German company became the first of the big six suppliers to announce new tariffs in response to the government’s price cap being raised.
The rise comes less than a week after the regulator Ofgem increased the cap on default tariffs to £1,254 a year for a typical household, because of higher wholesale costs.
Comparison sites urged the 1.8 million customers on the company’s default tariff to look for a better deal. The new tariff will be £286 more expensive than the cheapest deal on the market.
E.ON said it was making the increase in line with the decision by Ofgem to raise the cap and predicted other energy suppliers would make similar movements in pricing.
How does the energy price cap work?
The cap, one of the biggest shake-ups of the energy market since privatisation, came into effect on 1 January 2019 for 11m households on default tariffs, known as standard variable tariffs (SVTs). The government told the energy regulator, Ofgem, to set the cap because ministers argued people on SVTs were being ripped off by big energy firms capitalising on consumer loyalty. The limit is not an absolute one but the maximum suppliers can charge per unit of energy and for a standing charge. There is a separate cap for 4m homes on prepayment meters.
So why are prices moving higher?
In short: if energy market prices climb higher, the cap must move higher, too. The cap is designed to reflect the costs energy suppliers face, the largest of which is sourcing gas and electricity from the wholesale markets. In recent months energy markets have reached historic highs because of tight global gas supplies, causing one of the steepest energy price increases on record. Market prices have continued to climb since the new cap was announced, meaning another rise is likely in April once the regulator has revised its cost assessments.
Is there any way to avoid the increase?
In the past, households could save hundreds of pounds a year by spending a few minutes on one of the many comparison sites, or by signing up to an auto-switching service, and moving to a cheaper tariff, either with their existing supplier or a rival one. But the recent market surge means even fixed tariffs, which are not covered by the cap, are more expensive than the energy price cap itself. The best bet to keep bills in check is to use less energy: if you can afford to invest in insulation this can make a major difference to how much energy you need. Lowering the thermostat by a couple of degrees may also be an option for some.
When will bills begin to fall again?
It is too soon to say. Energy market experts believe gas and electricity wholesale prices will remain high through the winter and into 2022 because energy demand is recovering rapidly after the worst of the Covid-19 crisis. Some believe households may face rising energy bills for another 18 months. In addition to market prices, the regulator includes the cost of using energy networks and paying for government policies – which are also expected to keep rising.
Jillian Ambrose
“Ofgem’s energy market price cap review set out that price cap levels would increase, driven by rising wholesale and other costs,” an E.ON spokesperson said.
The big six, which control three-quarters of the UK energy market, had priced on average £4 below the initial cap of £1,137, which started on 1 January.
The expectation is that the other five companies will follow E.ON’s lead. Suppliers have to give 30 days’ notice of price increases, meaning all are likely to announce rises in February.
Rik Smith, an energy expert at uSwitch.com, said: “Standard tariffs were a bad deal at the old cap level and they’ll be an even worse deal at the new level.”
The price cap is a flagship government policy that ministers say will ensure people pay fair prices and stop companies exploiting loyal customers on poor value, default tariffs. Ofgem has said it expects the cap to fall in October.
