Market News

(Bloomberg) -- British households are set to face higher energy bills from April even as the regulator’s price cap falls by 23%.

Ofgem’s price cap, which represents how much a typical household would pay per year without any subsidy, will drop to £3,280 ($3,921) in the second quarter. Yet the government’s plan to raise its energy price guarantee — which limits bills — means consumers will pay more per unit of energy through July than ever before.

Industry and consumer groups have urged the government not to lift its subsidy level to £3,000, arguing that cheaper wholesale energy prices have eased the fiscal burden on the Treasury. Chancellor Jeremy Hunt has denied that there’s a windfall from the cheaper-than-expected support program that can be used to alleviate pressure on households hit by the cost-of-living crisis.

Wholesale gas prices have slid about 80% from August as Europe’s energy crisis eased, reducing the cost of subsidizing bills.

With the EPG level set to rise in April, the government will pay an annualized amount of just £280 of a typical bill, down from £1,779 in the current quarter. Consumers will have to cough up £500 more. Households will also lose support as a £400 grant paid over six months comes to an end.

Raising the EPG will save the government about £2.5 billion, according to consultancy Cornwall Insight.

“Government support will continue to help households with their energy bills,” a spokesperson for the Department for Energy Security and Net Zero said in a statement. “The cost of energy has already been falling and we expect this to drop further over the coming months, which we fully expect suppliers to pass onto their customers.”

Still, with the Ofgem cap getting nearer to the subsidy level, that could encourage a revival in competition between household energy suppliers offering cheaper fixed deals to attract customers.

“This significant fall in the Ofgem price cap should mark a turning point for the energy market,” said Richard Neudegg, director of regulation at price comparison website Uswitch. “Now is the time for fixed deals to return.”

The choice of fixed deals is expected to surge in July, when Ofgem’s cap is predicted to drop significantly below the government subsidy level, potentially sparking a stampede of customers switching suppliers in search of better deals.

(Updates with Cornwall Insight estimate in sixth paragraph and government statement in seventh paragraph.)