You will be £437 better off by July, but energy bills are still sky-high

Energy bills are expected to drop significantly from July, providing relief to millions of households. Fixed-rate energy deals could also start to return to the market, which would help create competition and drive down prices further. But are prices likely to continue to fall – or will we face another tough winter? And should you lock into a fixed-rate deal? Wealth & Personal Finance investigates.

What will I pay for energy?

British households will be £437 a year better off on average as the typical annual energy bill drops from £2,500 currently to £2,063 from July, according to forecasts from an energy data specialist. The typical energy bill will decrease from £208 a month to £172, Cornwall Insight predicts.

Wholesale prices have been falling thanks to a relatively mild winter and higher than expected European gas storage levels. Households across the UK and Europe have been reining in their energy consumption in recent months in the face of sky-high bills. This has led to a cut in demand, which has helped reduce prices.

Will I get any more Government support?

For the last few months, household energy bills have become unlinked from wholesale costs. That is because wholesale prices were so high that the Government stepped in to protect households from paying the true amount. Had it not, energy bills would have surpassed £5,000 a year for the average household last winter.

Now that wholesale prices are falling, these interventions will be gradually reduced. The Energy Price Guarantee (EPG) is one of the main protections in place. This ensures that a typical bill is just £2,500 a year until July. The EPG is set to rise to £3,000 a year in July.

However, although this guarantee will rise, it is unlikely that it will lead to an increase in household bills. That is because there is a second protection in place, called the Energy Price Cap. Set by the energy regulator Ofgem, the Energy Price Cap limits how much suppliers can charge their customers.

At the moment, the Energy Price Cap is £4,279 a year for a typical household. Because the Energy Price Guarantee is currently even more generous than the Energy Price Cap, the Cap makes no material difference to household bills.

But from July, the Energy Price Cap is predicted to fall below the Energy Price Guarantee, to £2,063. That will mean that the Energy Price Guarantee will become redundant and the Energy Price Cap will determine the size of household bills.

Remember that ultimately the amount you pay is determined by how much energy you use. If you use more than the average, your bill will be higher than the typical household bill.

What happens after July?

There are many uncertainties beyond July and no guarantee that prices will continue to fall this year and next, according to Cornwall Insight. Prices will be affected by factors such as the war in Ukraine, and the weather across Europe over the next few months. Unforeseen geopolitical events can quickly and dramatically shift wholesale energy prices. ‘While energy bills may begin to stabilise, they are still far from returning to pre-2020 levels,’ says Dr Craig Lowrey, an analyst at Cornwall Insight.

‘While consumers may feel more secure, we must not underestimate the fact that these bills remain unaffordable for many households.’

Should you fix?

Fixed-rate energy deals may start returning to the market again as wholesale prices start to fall. These deals allow you to lock in to a set price per unit of energy for one or two years.

Energy suppliers stopped offering them last year when wholesale prices became very volatile.

They didn’t want to offer customers fixed rates when they had no idea if wholesale prices would continue to rise, leaving them with customers paying under the market rate.

However, as prices stabilise, fixed deals may return.

Ovo Energy recently launched a 12-month, fixed-rate tariff of £2,275 for the average household to existing gas and electric customers. This is lower than the current Energy Price Guarantee.

Households that sign up to a fixed tariff that is below the Energy Price Cap and Energy Price Guarantee will save money if wholesale prices remain stable or rise again.

However, they miss out on the opportunity to lock in at an even better rate should prices fall further still. Fixed tariffs tend to have expensive exit fees.

‘If wholesale prices rise again later this year, a fixed deal could end up being better value, especially if it is priced lower than the cap,’ says Richard Neudegg at comparison website Uswitch.

‘However, the opposite could be true if wholesale prices fall further and the cap is lowered again during the fixed term. Either option should be considered carefully.’

What other help is there?

You may be able to get help if you are struggling to pay your energy bills. Contact your provider as soon as you can to see what support it can offer.

There are a number of schemes available from the Government, local councils, charities and energy providers. Citizens Advice has a good round-up at citizensadvice.org.uk/energy.

Don’t forget built-up credit

Check to see if you are in credit with your energy supplier.

Credit builds up when your direct debit payments are set at a higher level than you actually end up spending. You can claim back credit at any time, but early May is when you should have the least amount of credit because we have just come through the most energy-intensive winter months.

So if you have a lot of credit, consider getting your cash back.