Consumers will pay an extra £500 on their annual household energy bills from April despite Ofgem cutting the amount suppliers can charge by nearly £1,000.
Ofgem said the price cap on the amount suppliers in Britain can charge for energy will fall by around £1,000 to £3,280 from April.
However, instead of getting a £1,000 discount on their energy bills, UK households actually face a £500 increase from April.
This is because consumers will not actually pay the average price cap, due to the government’s energy price guarantee (EPG) which capped the energy unit price resulting in an average household bill of £2,500.
But energy bills are now likely to rise by around 20% as the EPG threshold will increase to £3,000 for an average household from 1 April.
The amount is not the maximum that can be charged but instead reflects typical usage levels. Customers using a lot of energy will have higher bills.
Ofgem chief executive Jonathan Brearley said: “Although wholesale prices have fallen, the price cap has not yet fallen below the planned level of the Energy Price Guarantee. This means that on current policy bills will rise again in April.
“I know that for many households this news will be deeply concerning.
"However, today’s announcement reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won’t make an immediate difference to consumers, it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease.
“If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower.
“However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of government support that is currently in place, this is a very tough time for many households across Britain.
“Where people are struggling, we urge them to contact their supplier to make sure they are getting all the help and support they are entitled to. We also think that, with bills continuing to be so high, there is a case for examining with urgency the feasibility of a social tariff for customers in the most vulnerable situations.”
Under the government's Energy Price Guarantee (EPG), a household using a typical amount of gas and electricity in England, Wales and Scotland is currently paying £2,500 a year for energy. Without government support, that annual bill would have been £4,279 since January.
The government compensates energy suppliers with the difference between the guarantee and Ofgem's cap.
Campaigners say ministers should stop a rise in energy bills in April.
Citizens Advice chief executive Dame Clare Moriarty has predicted the number of people who cannot afford their energy bills will double from April, the cost of living crisis will continue to grip the UK.
She told BBC Radio 4's Today Programme: “For most people, on average, we're going to see a £900 increase in people's bills.
“Now we know that that's going to be unsustainable for very many people. We estimate that the number of people who simply won't be able to afford their energy bills will double.
“So we'll go from one in 10 people to one in five people. That is a huge number of people.
“That's why we're saying that the government has to keep the energy price guarantee where it is at the moment - £2,500.
“We believe there are about three million people who would be paying more than 10% of their income on energy who won't be entitled to any of the targeted support that the Government's going to make available, so we are talking about literally millions of people who are going to see catastrophic impacts.”
When the upcoming end of the £400 energy rebate scheme – paid in six instalments of £66 and £67 a month – is factored in, the energy cost for households will increase even more.
Read more: How to beat supermarket price rises
Emily Fry, economist at the Resolution Foundation, said: “The latest Ofgem price cap is a stark reminder of the lag between falling wholesale gas prices, and falling household energy bills.
“While consumers won’t have to face typical bills of £3,280 this Spring, many are still set to see bills rise by a fifth as government support is scaled back.
“The chancellor should prevent this coming energy bills spike by maintaining the level of the EPG at £2,500 for a further three months.”
Around 4 million prepayment meter customers will pay an additional £45 a year, as energy companies say they cost more to serve.
Chancellor Jeremy Hunt told the BBC last week that although the policy remained under review, he did not think the government had the "headroom to make a major new initiative to help people".
Watch: Energy bills set to rise by 20% despite expected fall in price cap