Energy price cap set to rise by almost £100 in April

Regulator Ofgem blamed wholesale energy prices on the cap increase which will affect around 11 million households on standard variable tariffs (SVTs).

However, £23 of the new cap has been included to help energy suppliers deal with any bad debt arising from the coronavirus pandemic.

Customers on default tariffs could save hundreds on their annual bills by switching to a fixed deal.

Cap increase

The default price that covers 11 million customers across the UK will rise to £1,138 in April 2021, an increase of £96.

It's important to note this isn't the maximum a customer will pay for their annual energy bills. It just limits the amount energy providers can charge per unit of electricity and gas, and the £1,138 figure is Ofgem's bill estimate for a typical household.

The main driver behind this rise is the wholesale cost of gas and electricity, accounting for £66 of the increase.

Back when the previous default price cap was implemented in October 2020, it fell by £84 to £1,042 because the costs of energy on the wholesale market had plummeted thanks to the coronavirus crisis.

Now, though, the wholesale costs of energy are back to pre-pandemic levels, and the cap is now above the £1,162 it was set at in April 2020.

Bad debt allowance

The latest cap also includes a £23 allowance to cover the costs suppliers may face from customers failing to pay their bills in light of the coronavirus pandemic.

As far back as June 2020, energy suppliers were asking Ofgem to consider the impact of bad debt in their price cap calculations, but it wasn't featured in the October 2020 price cap change.

Instead, the regulator proposed a £21 extra allowance be added to the April 2021 price cap and consulted on the figure with suppliers.

This has been increased to £23 in the final cap calculation as Ofgem has used more recent data about the number of customer accounts.

The regulator has said the bad debt allowance needed to be included in the cap for April to September 2021 or it could potentially have increased it even more in future cap cycles.

They're open about the fact they don't yet know what the economic fallout of coronavirus is going to be for energy companies, so the final costs will be reflected in future price caps.

Energy debt

Whether the bad debt allowance is necessary or not, it's clearly a difficult time for energy customers to face higher household bills.

Research from Citizens Advice published in December 2020 found an additional 600,000 energy customers had been pushed into arrears compared to pre-pandemic levels.

Up to a quarter of all customers were concerned they wouldn't be able to pay their energy bills, meaning some customers may struggle to switch to a new energy supplier.

Energy sector rules mean customers can switch to a new provider if they have been in debt for 28 days or less, but customers with more than 28 days of arrears can't switch until they have paid back the money they owe.

While this means many customers who may benefit from switching to a new supplier ahead of the price cap increase can't switch until they have cleared their debts, it's also worth noting many major energy suppliers have signed up to Energy UK's Vulnerability Commitment to help vulnerable customers handle their energy bills.

It includes a commitment to provide a freephone telephone number for customers in financial hardship to use, along with a non-premium rate phoneline for all customers.

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