Martin Lewis debunks ‘nonsense’ myth about how energy bills work | Personal Finance | Finance
Market experts are predicting the price cap will likely go up 13 percent for the July to September period, as the effecsts of the Iran conflict start to be felt in the energy market. But Mr Lewis said it’s “really important” people understand what this means in practice as there is a misleading figure that is sometimes mentioned here.
He warned: “What you’re going to hear in the news is people talking about a £200 rise in the price cap. That is nonsense.” He said people often cite this figure as they “do not understand” how the system works.
This £200 increase is based on the average bill for a household paying for dual fuel by direct debit, under the price cap. The price cap refers to the unit rate of energy, with average usage then multiplied by these rates to give the average yearly figure.
Energy costs error
Under this calculation, data group Cornwall Insights is predicting that average bills will increase from £1,6652.52 a year to 1,850.13 a year. But it’s not correct that this means you will pay £200 a year extra for your energy.
Mr Lewis explained why: “The price cap lasts for three months. To quote a £200 a year rise would be foolish, because it only lasts for three months.
“And this three months [July to September] is the summer. We use about 15 per cent of our annual energy in the 25 per cent three months in the summer. It’s a quarter of the year.”
He crunched the numbers with an example: “For someone whose bills are £150 a month, a 13 per cent rise in the price cap in July equates to roughly £30 to £40 increased cost over the 3-month period. It is not good, but it is not catastrophic. It is nothing like the Ukraine period.”
What could happen with the energy price cap in the future?
Mr Lewis said it’s difficult to know what will happen with the price cap looking further ahead. He said: “The real question is what happens next. That’s where the problems come in.
“That’s why the Chancellor has just said she is keeping a watching brief on it. The current predictions for the October price cap are it will go up again 4.5 per cent, and then the January price cap up again 0.6 per cent.”
Although it’s hard to know how the price cap will move, Mr Lewis said “Even if the Middle East conflict ended next week, because of the damage to the infrastructure in the Middle East and the hits on Qatari gas plants – and it’s all about natural gas that dictates the primary costs we pay – it is very unlikely unless there is policy intervention we can see October’s price cap coming down to where we are now.”
He said it is “more plausible” that if the Iran conflict ends soon, it may not be until the January price cap that energy bills return to current levels.
