Ofgem announces energy price cap rise of 6.4%, just weeks after warnings that price increases risk derailing the UK’s net zero transition

UK energy regulator Ofgem has announced a 6.4% increase in the energy price cap from April, pushing the average household energy bill to £1,849 ($2,340) annually.

Published

February 26, 2025

Energy price cap set to rise by 6.4%

The UK’s energy price cap is set to rise by 6.4% from 1^st April 2025. It means that the average household bill for dual fuel (electricity & gas) will now be £1,849 per year ($2,340), up by £111 ($141) when compared with the pervious price cap. Ofgem places blame on a recent spike in wholesale prices as the main driver of yesterday’s (25/02/2025) price rise, with this accounting for around 78% of the total increase. They state that a small increase in policy costs and associated inflationary pressures make up the remaining 22%.

The energy price cap is the maximum amount that energy suppliers can charge consumers for each unit of gas or electricity they use, as well as the standing charge if on a standard variable tariff[i]. It was introduced by Ofgem in January 2019 to ensure fair pricing and protect consumers from excessive charges. The new cap is 9.4% (£159) higher than the same time last year when the average annual bill was £1,690 ($2,139). It does however remain considerably lower than at the height of the energy crisis back in 2023, at which time the average bill soared to £2,380 ($3,013).

It is worth noting that between 1^st October 2022 and 1^st July 2023 soaring energy prices were masked somewhat, when the UK Government introduced a temporary ‘Energy Price Guarantee (EPG)’ to protect households from a rocketing energy price cap, fixing it at £2,500. Without the EPG the average household bill could have reached as much as £4,000 per annum[ii]. The EPG was introduced by the previous Conservative government who subsidised energy costs to help households in response to the soaring gas prices which followed Russia’s invasion of Ukraine.

Industry calls for policy intervention to reduce UK reliance on gas imports

The rise in the price cap follows a warning from the ECC (Energy Crisis Commission) late last year, in which it raised concerns that the UK remains vulnerable to a future energy crisis, largely because the nation relies so heavily on imported gas. The result of the last crisis is an estimated 7.5 million UK homes in fuel poverty, and energy debts nearing £3.5 billion collectively, according to the ECC[iii].

The current Labour Government, elected last June, had promised savings of £300 per year on energy bills by 2030 in their election manifesto. On the news of price rise, Energy Secretary Ed Miliband has said: “This is worrying news for many families. This government is determined to do everything we can to protect people from the grip of fossil fuel markets.”[iv]

He added: “The way to deliver energy security and bring down bills for good is to deliver our mission to make Britain a clean energy superpower- with homegrown clean power that we in Britain control.”[v]

The rise in the price cap has seen calls for policy intervention to break the UK’s reliance on gas imports. Jonathan Brearley, CEO of Ofgem, has said: “We know that no price rise is ever welcome, and that the cost of energy remains a huge challenge for many households. But our reliance on international gas markets leads to volatile wholesale prices, and continues to drive up bills, which is why it’s more important than ever that we’re driving forward investment in a cleaner, homegrown system”[vi].

Energy UK’s chief executive, Dhara Vyas commented in a press release:

“Another price rise is unwelcome news when many are still struggling with bills and customer debt is approaching a record £4 billion. Today’s higher price cap is mainly due to an increase in how much we pay for the wholesale cost of energy – showing once again that Great Britain is too reliant on gas for heating and electricity generation which leaves us exposed to price rises driven by global factors”.

Vyas added that: “It is essential that we continue to take action to stop customers being at the mercy of volatile prices and unpredictable events in the future. By investing in our own sources of clean energy, we can ensure stable bills and avoid unexpected costs, as well strengthen our energy security”[vii].

Sam Alvis, associate director for the Institute for Public Policy Research (IPPR) has said:

"Households are once again facing higher bills as gas prices rise. The public is clear: they want to end this costly reliance and shift to homegrown, secure, and low-cost renewables. The transition to renewables will mean lower, more stable prices, freeing us from the mood swings of the gas market. But people need to see that the government is on their side now”[viii].

"Immediate action on household costs can help sustain public support for the rapid expansion of clean energy. The government should consider rebalancing costs between bills and taxation and review how Ofgem calculates charges.”[ix]

Future of net zero at stake

As discussed in ZCA’s previous insight, Octopus Energy have warned that public support for the net zero transition could rapidly erode should energy prices rise. At the time of writing in early February, the UK’s net zero ambitions remained popular, with twice as many people supporting net zero than not (43% vs. 20%). However, seven out of ten supporters (71%) at the time said that their backing hinged on energy prices not rising[x].

In a survey of 2,000 UK adults[xi], Octopus Energy found that the cost-of-living crisis remained the most pressing issue facing the country- with 90% of those surveyed saying that they were concerned about rising energy prices. Further, 88% said that cutting energy bills would be the best way for the government to help reduce household expenses. This was placed ahead of reducing supermarket prices and cutting mortgage & rental costs. In addition, reducing bills would likely have the knock-on effect of increasing public support for net zero, where 65% of people who currently oppose net zero say they would reconsider their position if the policy led to lower bills.

At the time Greg Jackson, founder of Octopus Energy, said: "British people support net zero, but not if bills rise. We need to reform the market urgently to maintain public backing for cutting emissions. Clean energy can be cheaper to generate, but our outdated market means consumers don’t benefit.”

He added: “Billpayers are forking out billions to switch off wind farms on windy days while households and industry struggle with high bills - instead of enjoying cheaper energy. A modern market could save tens of billions over the next 15 years."[xii]

Jackson refers to the current methodology used in running the UK’s energy market (marginal price-based) where gas effectively sets the price for all power sold on the trading on spot (or day-ahead) wholesale market. The power exchange ‘Nord Pool’ accepts bids in price order, from lowest to highest, until demand is met, in what is known as the ‘merit order’: sources of electricity with the lowest marginal cost of generation (typically renewables) are the first bids to be accepted, and sources such as gas are the last[xiii].

The marginal producer of electricity in the UK is most often gas because it is one of the most expensive sources, so is chosen last in the ‘merit order’ on the spot market, it is also easy to switch on and off to meet urgent demand. It means that even though gas is responsible for around a third of energy supply in the UK, it is the key factor for determining the price of nearly all energy sold.

The UK has among the highest electricity prices in Europe, even though the percentage of energy in the UK from renewables has grown from 10.7% in 2014 to 36.1% in 2023.