The Rising Energy Cap in the UK: What It Means for Households & Pensioners

As the UK approaches the colder months, a significant change in energy costs is on the horizon. The energy regulator Ofgem has announced a rise in the energy price cap, which will see a typical household’s annual energy bill increase by £149 starting in October 2024. This 10% hike brings the average yearly cost to £1,717, marking a notable shift from recent trends of falling energy prices.

While this increase is still lower than last winter’s peak, it is challenging for many households, particularly pensioners and those on fixed incomes. With the government withdrawing certain financial supports and halting winter fuel payments for 10 million pensioners in England and Wales, these rising costs are expected to be deeply felt across the nation.

Understanding the Energy Cap Increase

The energy price cap is a mechanism designed by Ofgem to limit the maximum price energy suppliers can charge for each unit of gas and electricity. This cap directly affects the energy costs of 27 million homes in England, Wales, and Scotland, ensuring that prices remain fair amidst fluctuating international energy markets. 

However, the latest cap increase is driven by higher global energy prices, exacerbated by geopolitical tensions and extreme weather conditions, which have intensified competition and demand for gas.

For households already struggling with the cost of living, this rise could not come at a worse time. Despite a brief period of relief with price reductions in April and July, the average bill payer will now need to add approximately 10% to their current annual energy bill. 

This translates to around £12 more per month for a typical user, a figure that might seem small but adds up quickly, especially for those on tight budgets.

The Impact on Different Households

The effect of the price cap rise will vary depending on several factors, including how energy is paid for and the efficiency of a household’s property. For example, households using prepayment meters—often a choice for those managing their budget more closely—will see a typical bill of £1,669, which is slightly less than those paying by direct debit. However, those who settle their bills quarterly by cash or cheque will face higher costs, with an average bill of £1,829.

Pensioners, who often have limited financial flexibility, are particularly vulnerable to these rising costs. 

The cessation of winter fuel payments for millions means that many will face the coldest months of the year without the additional financial support they have previously relied on. This change could lead to difficult choices between heating their homes and affording other essential expenses.

In Scotland and Northern Ireland, the payment system is decentralized. The Scottish government has announced that it will no longer offer winter fuel payments to all pensioners.

What’s changing with winter fuel payments?

From winter 2024, fuel payments in England and Wales will only be available to those receiving benefits and pension credit. 

Pension credit is a means-tested benefit based on income and savings. To be eligible, you must be above state pension age and have an income of less than £218.15 a week, or less than £332.95 as a joint weekly income with your partner.

However, your savings are also taken into account, so you may not be eligible even if your income is low. Despite these factors, disabled people, caregivers, and individuals with housing costs may still be eligible.

The Role of Standing Charges

In addition to the unit price of energy, households must also contend with standing charges—a fixed daily amount that covers the cost of connecting to the energy supply. Although these charges are relatively small—61p per day for electricity and 32p per day for gas—they can add up over time and represent a significant portion of the bill for low-energy users. Critics argue that these charges disproportionately affect those who consume less energy, such as pensioners and small households.

Moreover, the regulator is introducing an additional £28 to every bill annually to cover the cost of dealing with £3.1 billion of customer debt owed to suppliers. This charge further complicates the financial outlook for households already struggling with their energy costs.

Future Prospects and Government Response

Looking ahead, analysts warn that this may not be the last price increase. There are concerns that further hikes could occur in January, adding to the financial strain on households. The situation has prompted Energy Consumer Minister Miatta Fahnbulleh to convene a meeting with energy suppliers to discuss measures to support the most vulnerable customers.

In the long term, Ofgem is considering reforms to the energy pricing system, including options for variable pricing throughout the day to reflect demand. While such measures may offer some relief to consumers, they are unlikely to offset the immediate impact of the current cap increase.

Conclusion

The rise in the energy price cap is a stark reminder of the challenges facing UK households as they navigate an increasingly volatile energy market. While the government and regulators are exploring options to mitigate these impacts, the immediate burden will fall on consumers—particularly pensioners and low-income households—who may find it difficult to manage these rising costs. As we head into winter, the need for targeted support and long-term solutions has never been more urgent.