Household energy bills are set to rise by a quarter in January, with the annual cost of heating a typical home climbing by £443 to £2,166, according to EDF. The increase comes despite oil and gas prices falling in recent weeks, as the assessment period for calculating the new energy price cap ends on Tuesday. The price cap, which affects 22 million households on a standard variable tariff, is based on the average wholesale cost of energy during a 90-day observation period.
Oil and gas prices have remained elevated throughout most of the assessment period. A barrel of Brent crude hit £117 last month as the Iran war continued, before slipping below £100 at the start of this month as hopes of an end to the nine-month conflict increased. However, this recent decline came too late to prevent the predicted 26 per cent rise in the price cap. The new tariff will apply to dual-fuel households paying by direct debit and will run until the end of March. It will be confirmed by energy regulator Ofgem at the end of this month, but will not affect the 11 million households on fixed-rate contracts.
The surge in energy bills is expected to push inflation higher, with Bank of England Governor Andrew Bailey recently warning that a rise to 5 per cent in the first half of next year was 'quite baked in' because of how the energy price cap works. Traders now expect the Bank's base rate to rise to 4.25 per cent next month. Higher interest rates would increase borrowing costs for mortgages and loans. Chancellor John Healey has drawn up contingency plans in case the Middle East conflict escalates further, and has told MPs that a further cost-of-living support package 'should that be necessary' was not ruled out.
The government has already announced measures to help households weather the energy shock. These include a £100 handout from January for 20 million households in council tax bands A to D in England, the removal of VAT on electricity bills and a 5p-a-litre cut in fuel duty. Daily standing charges for gas will also be scrapped from as early as next year, meaning households that use more gas will pay more, while those who use less will pay less. Experts say the £100 payment will provide some relief this winter, though other measures will take time to show their full effect.