Millions of households across Great Britain will see a small but unexpected increase in their energy bills from the start of the new year, the regulator Ofgem has confirmed.
What the Price Cap Change Means for Your Bills
The energy price cap, which limits the rate suppliers can charge customers on standard variable tariffs, will rise by 0.2% from January 1st. This change applies to households in England, Wales, and Scotland.
For the average home paying by direct debit for both gas and electricity, this translates to an increase of approximately 28 pence per month. Annually, the typical bill will rise from £1,755 to £1,758.
The slight uplift comes as a surprise, given that forecasters at Cornwall Insight had predicted a 1% fall in prices due to lower wholesale energy costs. Ofgem acknowledged that wholesale prices, which form the largest part of bills, have fallen by 4% over the last quarter and are currently stable.
Why Bills Are Rising When Wholesale Costs Are Falling
The primary drivers of this price cap change are increases in Government policy costs and operating expenses, which have offset the benefit of cheaper gas.
A significant factor is the funding for the Government’s Sizewell C nuclear power plant in Suffolk. The £38 billion construction project is adding an average of £1 per month to each household's energy bill for its duration.
Additionally, standing charges—the fixed daily fee for having a energy supply—are set to increase. From January 1st to March 31st, electricity standing charges will rise by 2% and gas by 3%, equating to about 2p more per day. This is largely to cover costs linked to the expansion of the Warm Home Discount scheme, which this winter will provide a £150 discount to around 2.7 million more low-income households, including 900,000 families with children.
Ofgem also stated that operating costs are increasing due to a change in how it calculates typical energy consumption, which it says better reflects modern usage patterns and is fairer to suppliers.
The Mixed Impact on Households and Calls for Change
The composition of the price cap change means the impact will not be felt equally. Higher electricity unit rates are the main driver, while gas rates will see a slight decrease. Consequently, households that rely on electric heating could be hit the hardest.
Tim Jarvis, Ofgem's Director General of Markets, commented on the volatility of the market, stating: “While wholesale energy costs are stabilising, they still make up the largest portion of our bills which leaves us open to volatile prices.”
Think tank Resolution Foundation highlighted that the rise in government policy costs is cancelling out the slight fall in gas prices. Its principal economist, Jonny Marshall, urged government intervention: “The Chancellor should help families struggling with the cost of living in her upcoming Budget by taking some policy costs off electricity bills and onto general taxation. This would cut typical bills by around £160 a year.”
Despite the January increase, Ofgem noted that when adjusted for inflation, the new price cap is actually £37 lower than the cap set for the period between January and March in 2025.
