Energy Price Cap Rises Despite Falling Wholesale Costs in Early 2025

Energy bills are set to increase by £3 from January as Ofgem, the UK energy regulator, has announced a new price cap of £1758 per year for the typical household. This increase, up from the current cap of £1755, contradicts the expectation that households would benefit from declining energy prices. The rise follows two consecutive quarters of increases and raises concerns that bills may climb further in April.

Ofgem attributed January’s rise to higher government policy and operational costs, noting specifically that funding for the Sizewell C nuclear power plant will add approximately £1 per month to household bills. Additionally, the warm home discount scheme, which provides £150 off bills for the most vulnerable, is now being financed through higher overall charges. Despite these increases in policy-related expenses, Ofgem indicated that wholesale energy prices have decreased by 4 percent in recent months. Wholesale gas costs in Europe have reached an eighteen month low, supported by prospects of a Ukraine peace agreement and milder weather across the continent.

The marginal increase in the price cap for January surprised many forecasters, who had predicted a reduction. Cornwall Insight, a leading analyst, had anticipated bills would fall to £1733 in the first quarter of 2025. Their projections also show an increase to £1808 in April, largely attributed to rising network charges as the sector invests heavily in net zero infrastructure upgrades. Industry analysts warn that this trend towards rising non wholesale costs is expected to persist for the foreseeable future, undermining previous advantages gained from falling wholesale prices.

Cornwall Insight reports that wholesale prices are forecast to account for less than 40 percent of the price cap for the rest of the decade. Non wholesale expenses, particularly those related to network investment and green levies, are projected to represent over 60 percent. According to independent energy analyst Ben James, these developments could see the average annual household bill rise by nearly 17 percent or around £160 by 2030 even if wholesale prices continue to fall from current levels.

The government has responded by highlighting immediate measures such as the expanded warm home discount for millions of families this winter. It has also reaffirmed a long term commitment to lower bills through its clean power initiatives and strategic investment in nuclear energy. The government’s clean power mission aims to provide more affordable electricity, stimulate economic growth, and create jobs. Ministers, however, remain under pressure from energy companies and political opponents to address the increasing burden of levies set to fund net zero targets.

Senior executives from major suppliers including Octopus Energy, Centrica, EOn, EDF, and Ovo have urged ministers to reform the system, warning that without intervention bills are set to increase by several hundred pounds this decade. Rachel Fletcher of Octopus Energy predicts that electricity prices could be 20 percent higher within five years even if wholesale costs were to halve. Conservative critics have argued that current net zero plans and the associated levies are disproportionately driving up costs for ordinary households, while industry experts caution that forcing more renewable projects through auctions to meet ambitious 2030 targets may risk making renewable energy more expensive in the near term.

The debate over energy affordability and the balance between investment in clean energy and the burden on consumers is poised to remain a central issue for households, industry and government in the months ahead.