What is the marginal price of energy and why does it change?

Energy consumers are likely to see significant increases in bills every three months, rather than every six months, as Ofgem warns they face a “very tough winter.”

The regulator said the change would provide some stability to the market after Russia’s actions in Ukraine have led to continued volatility, adding that “nobody has an interest in seeing more suppliers fail and leave the market.”

Here, the PA news agency takes a look at what the price cap is, why customer prices will rise further, and what they can do to cope with the surge.

– What is the price limit for energy carriers?

Ofgem, originally the Gas and Electricity Markets Authority, is an independent regulator of the UK energy market and is dedicated to providing maximum protection to customers.

A key part of its role is to set a cap – a price cap – on what utilities charge customers by default or at standard variable rates.

Variable rates used to be more expensive than fixed rate deals, and people often take advantage of these rates if they have never changed providers, the fixed term has expired, or their supplier has gone bankrupt.

About 23 million households regulate their domestic electricity bills according to the price cap.

There is also a separate price cap for customers using prepaid meters.

On a standard electricity bill, the price cap defines the maximum fixed charge and price per kWh of gas and electricity that your supplier can charge you.

– How is it changing?

The price cap was introduced in 2019 and is to be changed twice a year. It changes in April to cover the summer months, when people tend to use less energy, and again in October before an expected increase in usage.

The next change will be announced at the end of this month and will go into effect in October. Ofgem chief executive Jonathan Brearley suggested in May that it would likely skyrocket to “around £2,800” for the average household, but he has since warned of a significant increase from an estimate made in May. “It just shows how dramatically the market is changing,” he said.

Ofgem has confirmed that it will update the price cap quarterly because the market moves so fast and people can’t pay the rate for up to six months.

– How is it calculated?

Ofgem bases the price cap on how much it would cost a typical energy supplier to provide power to an average home.

In his calculations, he uses many factors that affect electricity bills, and also takes into account usage levels and market data for a certain period.

The key factors are the wholesale gas and electricity costs for suppliers and the network costs they have to pay, such as infrastructure.

Ofgem also considers suppliers’ operating costs and profits.

In addition, environmental liabilities and taxes can be considered as part of the marginal price values.

Why are energy prices rising?

The recent surge in energy prices was driven by wholesale prices, in particular by the sharp rise in the cost of gas.

Gas prices on world markets jumped six times before the invasion of Ukraine.

Last year, countries in Asia and Europe tapped into large amounts of gas reserves during the long winter, which helped drive up prices, and the economic recovery also boosted energy consumption.

More recently, Russia’s invasion of Ukraine has led to the restriction of Russian gas supplies, which in turn has led to higher prices.

In the UK, very little gas comes from Russia, but this hasn’t protected suppliers from pricing pressures in the rest of Europe, which typically gets about 40% of its natural gas from Russia.

– What can customers do if they are worried about their rising energy bills?

Ofgem suggests contacting your supplier as soon as possible if you are worried about paying your electricity bills or have a debt with your supplier.

Suppliers must work with you to agree on a payment plan that customers can afford in accordance with Ofgem’s policies.

People can ask for more time to pay, access to relief funds for those in need, and pay breaks or reductions according to potential options.

Some energy companies offer certain schemes, such as if someone makes their home more energy efficient or offers a free boiler inspection and upgrade.

Some people may also qualify for certain forms of assistance, such as winter fuel or a warm home discount program. Some charities may offer grants.

Ofgem specifically urged consumers not to join the “Don’t Pay” group, which is asking people to add their names to a pledge to abolish direct payments for gas and electricity from October 1 to protest the price hike.

The regulator warned that this would only lead to higher costs for everyone and could lead to debt problems.