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Cost of living: Energy bills still 80% higher than before the crisis, experts warn

  • Energy bills for millions of households set to decrease

  • However, the latest energy price cap figures offer limited relief for those struggling the most

  • Average bills will fall £426, despite price cap decreasing by £1,206

Gas And Oil Concept. Energy Crisis. Blue Flame Of Gas Stove Top
Ofgem's announcement is a step in the right direction, but it's not quite as promising as it appears at first glance. (Getty Images)

After a challenging period of sky-high gas and electric bills, energy regulator Ofgem has announced some good news for struggling households.

On Thursday, it confirmed the energy price cap – the maximum price that suppliers can charge – will be lowered from £3,280 per year for a typical household to £2,074 from 1 July.

However, in reality, the price drop for most households will be around 17%, as since October the government's energy price guarantee has kept the average annual cost of energy at £2,500.

That works out at around £426 for the typical household.

While experts at the Resolution Foundation think-tank have said Ofgem's announcement will be "welcome news for struggling families" they say there is still plenty of work to be done – pointing out that families have suffered a massive increase in recent months that many are struggling to absorb.

“Expected energy costs for a typical household this year are now on course to be around £2,100 – still up by almost 80% on what families were used to pre-crisis," said Emily Fry, an economist at the think-tank.

“A return to the level of bills households paid pre-crisis isn’t arriving anytime soon. The case for developing more sustainable support with energy bills, such a social tariff for vulnerable households, therefore remains strong.”

Simon Francis, coordinator of the End Fuel Poverty Coalition, added: “The UK government needs to use the summer to fix Britain’s broken energy system, because for millions of people the energy bills crisis is far from over."

Why is Ofgem’s price cap falling?

Ofgem is lowering its energy price cap because wholesale prices – the amount energy suppliers pay for gas and electricity before distributing it – has been coming down since last autumn.

This has prompted confusion, with some asking why it is taking so long for household to feel the benefits – but there is a reason for this.

To be able to offer fixed rates, energy suppliers need to buy in advance, and buy continuously, in order to ensure there's enough to cover demand.

UK inflation rate for food & non-alcoholic drinks. (PA)
UK inflation rate for food & non-alcoholic drinks. (PA)

As Alex Staker from price comparison site Bionic explains: "If demand exceeds supply then they need to buy more at current market prices to cover the shortfall.

"But if supply exceeds demand, then suppliers need to sell the excess energy back to the grid – if the day-ahead price is lower than the price they bought the energy for, then they'll lose money."

In other words, the energy bills we pay today don't necessarily reflect the current spot price of energy on the wholesale market due to the way suppliers buy their energy in advance.

What will the energy price cut mean for the future?

A fall in energy bills will likely mean an overall reduction in inflation.

The UK is neck-and-neck with Italy in having the highest rates of inflation out of any of the G7 nations. CPI inflation fell to 8.7% in April, falling out of double digits for the first time since last summer.

With food and drink price inflation remaining above 19%, anything to ease households' monthly budgets will be very welcome news.

Pay growth v inflation. (PA)
Pay growth v inflation. (PA)

Ofgem chief executive Jonathan Brearley has said that he would expect energy prices to “stay stable” but warned that any projections are very unreliable.

“Every projection I’ve seen of how the gas market might evolve has turned out to be substantially wrong," he told MPs on the public accounts committee.

“The good news is the price has been coming down for some time. I hope that will continue," he added.

“But it would only take one significant supply event or indeed, a big change in international demand, like demand from China, to see that situation reverse.”

Energy price cap: Read more

Martin Lewis: 'Tough winter ahead'

Household finance guru and Money Saving Expert founder Martin Lewis has predicted that this winter people will be paying roughly the same as the year before.

“For every £100 you pay on energy now you’ll likely be paying £80-85 on energy from July. So that is a real manifest drop in energy bills," he told BBC Radio 4's Today programme.

“The truth is that’s probably it. From October it might go down a little bit more but then we expect it to bounce back a bit in January.

“And if those are true, the reality is next winter, the winter coming, people will be paying roughly what they did last winter because rates are cheaper but they’re not getting the £66-67 a month (state) support.

“People will still be paying double what they used to pay before the energy crisis hit.”