The price cap and your energy bills: what you need to know

The price cap and your energy bills: what you need to know

By: Shell Energy

03 Feb 2022

With energy prices dominating the headlines, no doubt you’ll have questions about Ofgem’s April price cap increase. We recognise the difficulties this increase will cause, especially when the prices of so many other goods and services are also rising.

The nature of the energy cost increases means this isn’t something that suppliers can solve by ourselves – we believe it needs a government response. That’s why we’re asking the Government and Ofgem (the UK’s energy industry regulator) to offer households more support.

We’ve been pushing the Government to recognise the urgency of the situation, and are encouraged to see that they’re proposing measures to help struggling households. We’ll review these measures as we learn more about them, and continue conversations with the Government as needed.

Right now, wholesale prices are extremely high. That means people across the UK are seeing their energy bills rise, no matter what supplier they’re with. This isn’t just an issue here in the UK, either – it’s happening across the world.

As a supplier, we’re currently buying energy at a much higher price than the price cap will allow us to sell it for. Because of this, Ofgem is increasing the level of the price cap in April. The price cap is calculated by Ofgem to reflect a fair price, based on the true costs of supplying UK homes with gas and electricity, and also to protect you as a customer.

The new price cap, which comes into effect on Friday 1 April, means that customers on a flexible (standard variable tariff) will see a change to their energy bills.

If you’re on a fixed energy tariff, rest assured – these price changes won’t affect you until your fixed tariff ends. We’ll be in touch with your options closer to the time.

The energy market: what you need to know

In this guide, we look at the state of the wholesale energy market, including why wholesale energy prices are rising, how the energy price cap protects customers, and what we’re doing to help.

Why are wholesale prices rising?

Last year wholesale gas prices reached record highs – in August 2021, gas prices were a full 459% higher than they were the year before. Wholesale power prices (which are linked to, and follow, wholesale gas prices) have also continued to rise.

Dual fuel wholesale energy costs from April 2021 to January 2022
There are a number of reasons wholesale energy prices have increased around the world. These include a cold and longer than usual winter last year that put pressure on supplies, high demand in Asia, and increased dependence on gas imported from international markets.

Why can’t energy suppliers charge less?

You might assume that rising energy bills mean bigger profits for your supplier, but, in fact, less than 1% of your energy bill is profit. As Ofgem’s figures show, some 99% of costs are outside of our control. And in fact, most suppliers have actually been making a loss as the cost of energy is much higher than the prices we are currently charging.
Dual fuel energy bill breakdown of costs

Source: https://www.ofgem.gov.uk/publications/infographic-bills-prices-and-profits

Wholesale energy costs account for a large part of your bill (around 35%), while there are also things like network costs (pipes, wires, etc), operating costs, taxes, and VAT to consider.

What this means is that when the markets change significantly, our prices need to adjust as well. We work hard to keep our costs low so we can absorb as many of these costs as possible. But, unfortunately, the latest increase in wholesale prices has been so significant, we’ll have to increase our rates in line with the new price cap.

What is Shell Energy doing to support me?

Although energy prices have increased, the price cap has protected customers from higher bills during this volatile period. We’ve also absorbed hundreds of millions of pounds worth of rising costs.

In part because of the recent energy-cost increases, 29 energy suppliers have gone into administration in the past year. We’ve been proud to take on over half a million affected customers and support them with their energy needs during this unprecedented time. We’re a well-backed business, and run a sustainable business model that gives our customers long-term security and confidence.

Even so, we know this change will be difficult for many households. That’s why we’re here to help people struggling with higher bills. We’ve created a hub for customers who need extra support. Here you’ll find details of government schemes and debt support, as well as energy-saving advice. And no matter what happens, we won’t cut off your energy supply.

What is Shell Energy doing to build a better energy future?

Under the Shell Energy brand, Shell is guiding households and businesses towards a better energy future. We’re also working to change the way the UK energy system works, so that we can start relying less on gas.

Shell is working to provide customers with more renewable and low-carbon energy options, by investing in wind, solar, electric-vehicle charging, hydrogen, and more. That’s why Shell has partnered with Scottish Power to build and operate two world-leading offshore floating wind farms that will power around six million homes.

We’re committed to the transition to net zero, and changing how Britain’s homes are heated and powered. As we move towards low-carbon heating solutions and generate more electricity from renewable sources, the UK will become less reliant on gas and less vulnerable to changes in gas prices.

We also have an online shop which offers energy-efficient products such as smart thermostats and smart lighting. And we’re rolling out smart meters, which help give customers more insight into how they use their energy and prompt them to be more energy efficient.

How does the energy price cap protect customers?

The price cap is calculated by Ofgem to reflect a fair price, based on the true costs of supplying energy to the home.

Right now, the price cap is, on average £1,277 per year. But from Friday 1 April this rises to £1,971* to reflect how much suppliers have to pay for the energy we provide you with.

Does that mean my bills will never be higher than the cap? 

It isn’t your bill that’s capped, but the unit price of your energy. That means the less energy you use, the less you’ll pay. See our energy-saving tips for ways to take control of your energy use.

How does the price cap work?

Ofgem reviews the price cap every six months to make sure that the price you pay your energy supplier reflects the actual cost of providing you with that energy. 

If these costs go up, the price cap goes up with it. If those costs decrease, the price cap will come down too.

Does the price cap increase affect me?

That depends what type of tariff you’re on:

If you’re on a flexible tariff

If you’re on a flexible tariff, the price cap increase will affect you. We’ll send you an email or letter to let you know how your prices will change.

In a typical household, credit customers will pay £693 (excl VAT) more on their annual energy bill, which will work out at £60 per month. Prepayment customers will see an increase of £708 (excl VAT) per year, or £59 per month.*

We know these increases are going to be difficult for many households. If you’re struggling with your energy bills, here are some ways we can help.

If you’re on a fixed tariff

Fixed tariffs protect you from energy-market price rises for the length of your contract.

If you’re on a fixed energy tariff, the amount you pay per unit for your energy won’t change. That means April’s price cap increase won’t affect you immediately.

When your fixed tariff is ending, we’ll get in touch to discuss your options.

What is a standing charge?

A standing charge is a fixed daily amount that’s applied to your bill. The charge is based on the costs suppliers pay for providing your home with energy. It includes the operating and network costs we have to pay the companies who own the wires and pipes that carry your energy. This year their charges have increased by 39%.

The standing charge also includes a levy of £68 per household per year. This amount is set by Ofgem, the UK’s energy regulator, to recover costs associated with the collapse of 29 energy suppliers this past year. This is known as the Supplier of Last Resort levy.

An update on our energy tariffs

You’re no doubt aware of high energy costs and how this is a truly unprecedented time in the market. Last October we removed our fixed tariffs when wholesale prices dramatically increased, as we could no longer offer our customers great-value tariffs.

We’re monitoring the situation closely, and will go back to offering fixed tariffs as soon as we can. You can find the latest updates on our energy tariffs page.

When will the price cap changes take effect?

The new price cap comes into place on Friday 1 April. We’ll be contacting our customers to let them know how they’ll be affected.

What happens if I need extra support?

We understand that rising energy prices will impact our customers, and want to do all we can to help. If you’re struggling to pay your bill, get in touch with our team:

To find out more about how the price cap works, visit Ofgem’s website.

* The average annual bill figure is for illustrative purposes only and is based on Ofgem’s national average consumption rates of 2,900kWh of electricity and 12,000 kWh of gas. Your actual costs may differ based on the amount of energy consumed. https://www.ofgem.gov.uk/publi...

† Lines are open 8am to 6.30pm Monday to Friday or 9am to 4pm Saturday.