Trystan Casey
Energy prices have been a significant concern for households since the energy crisis began in 2021. The energy price cap, which sets the maximum amount customers can be charged per unit of energy, has been rising since then, with a record 80% increase in 2022. While the price cap is expected to fall slightly in July 2025, providing some relief to consumers, it is not expected to drop dramatically. Fixed-rate tariffs, which offer a set rate for a certain period, have re-entered the market after years of absence but still carry the risk of being stuck with a higher rate if prices drop. With the wholesale market remaining volatile, there is no easy answer to locking in lower energy prices. Improving energy efficiency is one way to reduce bills without compromising on heating and power.
| Characteristics | Values |
|---|---|
| Energy Price Cap | Between 1 April and 30 June 2025, the energy price cap is £1,849 per year for a dual-fuel direct debit household using a typical amount of energy. |
| Fixed-Price Deals | Fixed-price deals are not affected by the energy price cap and offer certainty for a set period, often a year or longer. |
| Standing Charges | Standing charges are a fixed daily fee to cover the costs of connecting to gas and electricity supplies. They vary slightly by region. |
| Prepayment Customers | Ofgem has ensured that prepayment customers who get their gas and electricity from the same supplier pay less than direct debit customers. |
| Wholesale Market | Prices on the wholesale market remain volatile, making it challenging to predict how prices might move over the year. |
| Energy Efficiency | Improving the energy efficiency of properties is one way to substantially reduce energy bills while maintaining adequate heating and power. |
| Northern Ireland | Energy prices in Northern Ireland are not controlled by the price cap, and the largest electricity supplier cut prices in November 2022 below those in the rest of the UK. |
| Price Cap Prediction | Cornwall Insight predicts that the price cap will drop slightly in the third quarter of 2025 if geopolitical tensions ease. |
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What You'll Learn
The energy price cap
The actual rates charged to customers vary by region, payment type, and the type of meter. Suppliers may offer a lower standing charge for their default tariffs under the price cap, but they need to demonstrate that the overall amount charged to consumers is at or below the total price cap. Fixed-price deals are not affected by the energy price cap, and customers who want the security of knowing their bill amount may consider moving to a fixed deal.
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Fixed-rate deals
Fixed-rate energy plans allow customers to lock in a rate for electricity for a set period, often 12 or 24 months. This means that the price per kilowatt-hour (kWh) stays the same throughout the contract, even if market prices change. This can be beneficial in a volatile energy market, as it allows customers to better manage their energy costs and have peace of mind. It also makes it easier for customers to plan and budget their monthly expenses.
However, there are also potential drawbacks to fixed-rate plans. For example, if energy prices drop when a customer is on a fixed-rate deal, they may end up paying a higher price and could be stuck with it for the duration of their contract. Additionally, fixed-rate plans may have early cancellation fees, so customers should be sure to understand all the costs involved.
When considering a fixed-rate plan, it is important to compare rates across different providers and plan types. While fixed-rate plans offer stability, variable-rate plans can sometimes be cheaper, especially if market prices drop. Variable-rate plans also offer more flexibility in terms of switching plans when energy prices change.
In the UK, the energy price cap sets the maximum amount that can be charged per unit of energy and changes every three months. This cap applies to standard variable tariffs and does not affect fixed-price deals. Customers can use whole-of-market energy price comparison sites to find the best deals and consider their options, such as the various tariffs offered by different suppliers.
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Standing charges
A standing charge is a fixed daily fee that is applied to your bill if your property has a gas and/or electricity connection. This means that you will be paying this fee even if you don't use any energy for the entire day. The fee covers the cost of supplying your property with electricity and gas and is used for maintaining the energy supply network, meter reading visits, and government support schemes. Standing charges are included with prepayment energy tariffs and must be paid even if there is no credit on the meter. The charges are set by the energy supplier and are based on how much it costs to maintain the energy network, operating costs, and government support schemes.
Campaigners argue that standing charges are unfair because they make up a bigger proportion of the bill for low energy users. In response, Ofgem has said that energy firms must provide a choice of price-capped tariffs from winter 2025, with one option being a tariff with no standing charge but a higher unit rate. Removing standing charges from energy bills could benefit low-usage households, but no-standing-charge tariffs are likely to come with higher gas and electricity unit rates.
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Geopolitical tensions
The global shift towards renewable energy sources has introduced new geopolitical dynamics. Countries rich in raw materials for renewable technology, such as lithium, cobalt, and rare earth elements, have leverage in the global clean energy supply chain and can influence prices. Additionally, government interventions, such as subsidies for fossil fuels or renewable energy incentives, can also affect supply and demand, impacting energy prices.
Geopolitical risks can affect oil prices through two main channels: the economic activity channel and the risk channel. Higher geopolitical tensions increase uncertainty about the economic outlook, negatively impacting consumption, investment, and international trade. This leads to a contraction in global economic activity and a dampening of global oil demand and prices. On the other hand, the risk channel involves financial markets pricing in higher risks to future oil supply, increasing the cash value of holding oil contracts and putting upward pressure on prices.
Regional conflicts and geopolitical strains expose the fragilities in the global energy system, emphasizing the need for stronger policies and greater investments in clean energy transitions. Geopolitical tensions can also influence the pursuit of critical materials, leading to increased competition and potential sparks of tension in areas like the Arctic, outer space, and the deep sea.
While the impact of geopolitical tensions on energy prices is complex and varied, it is clear that they play a significant role in shaping the energy market and prices. The specific consequences depend on the countries involved and the nature of the geopolitical shocks.
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Energy efficiency
For homeowners, simple changes in habits can lead to significant savings. For instance, reducing water heater temperatures, unplugging idle electronics, and adjusting thermostats can collectively reduce energy consumption. Additionally, weatherizing homes through sealing windows and doors, adding attic insulation, and using thermal curtains can stabilize indoor temperatures, reducing the reliance on heating and cooling systems.
Upgrading to energy-efficient appliances is another effective strategy. Modern heat pumps, ENERGY STAR-rated washers and dryers, and smart thermostats can substantially reduce energy usage and lower bills. Federal tax credits and grants are often available to support these upgrades, making the transition more affordable.
On a broader scale, the expansion of renewable energy sources, such as solar and wind power, is crucial for driving down electricity prices in the long term. While the integration of renewable energy may not immediately translate to reduced residential bills, it lays the foundation for greater affordability and energy independence.
While the price of electricity is largely influenced by supply and demand, regional factors, and fuel costs, proactive measures to improve energy efficiency can empower individuals to mitigate the impact of rising prices and promote a more sustainable energy landscape.
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Frequently asked questions
Energy prices are not expected to fall dramatically in 2025. However, the price cap is predicted to go down in the second half of 2025, which could make price-capped energy deals cheaper.
The energy price cap sets the maximum amount customers can be charged for each unit of energy. The cap is set every three months by Ofgem, the energy regulator. It covers around 21 million households in England, Wales, and Scotland.
One way to reduce energy bills is to improve the energy efficiency of your home. You can also consider switching to a fixed-rate energy tariff, which offers more stability than variable rates governed by the price cap.
