Ministers have been privately warned that millions of consumers face a massive increase of more than one-third (34 per cent) in energy prices next spring, The Independent can reveal.
Energy industry sources said that they told the government that the huge hike in the energy price cap will be needed next April, based on current trends, to avoid further companies going under.
A 34 per cent rise in the legal maximum charge for fuel would mean bills soaring by an average of around £434 a year for customers on default tariffs paying by direct debit, and even more for those with pre-payment meters.
It would be the second abrupt hike in quick succession in the cap, which is set by regulators Ofgem to protect consumers from excessive charges.
And it would leave annual prices for the 15 million consumers covered by the cap at around £1,711 for direct debit and £1,754 for pre-payment.
Details of the warning have emerged just days after Boris Johnson brushed off fears of rising inflation at the Conservative annual conference in Manchester.
Asked in a TV interview on Tuesday whether he was concerned by the prospect of rising prices, the prime minister said: “People have been worrying about inflation for a very long time. I’m looking at robust economic growth. And by the way, those fears have been unfounded.”
Ofgem chief executive Jonathan Brearley warned that there may have to be an “adjustment” in the cap when it comes up for its next six-monthly review in April.
Gas prices have escalated sharply in recent months, driven by increased demand from China, amid concerns that Vladimir Putin is using the issue to win leverage over the West in a row over a controversial new gas pipeline linking Russia with Germany.
Business secretary Kwasi Kwarteng was today meeting with representatives of high energy-use industry to discuss their response to any further spikes in costs.
Speaking on Thursday, Mr Brearley said: “Although the gas price rise is unprecedented today, we will need to plan on the basis that shocks like this could happen again.”
He said the cap was “designed to reflect fair costs and therefore will need to adjust over time to reflect the changes in fuel costs that we are seeing today”.
Consumers are already reeling from an increase in the price cap on 1 October, when those on default tariffs paying by direct debit saw an increase of £139 from £1,138 to £1,277 and prepayment customers were hit by a rise of £153 from £1,156 to £1,309.
But industry sources said that this 12.5 per cent increase did not reflect much of the recent spike in wholesale prices globally.
They said a far larger increase will be needed in April to absorb the growing cost to suppliers of accessing the energy sources which the UK needs.
One told The Independent: “Ministers have been warned that the cap will have to rise by a third.
“There will be strong political pressure on them to stop Ofgem raising it. But they will have a huge dilemma because, if they do that, even more energy companies will go under.”
Industry sources speculated that chancellor Rishi Sunak could seek to cushion the impact on hard-pressed consumers by announcing help with bills for low-income households or imposing a temporary cut in the 5 per cent rate of VAT on domestic heating fuel.
Government sources said that Ofgem would not start calculating any changes the level of the cap until spring, so it was difficult to make predictions at this point.
Mr Kwarteng has made clear that his priority is to protect consumers, said a source. It is understood that there is an acceptance within his Department for Business (BEIS) that the cap may force some smaller supplies out of business.
An Ofgem spokesperson declined to speculate on the future level of the cap, but added: “Ofgem’s number one priority is to protect customers. We know this is a worrying time for many people.
“The energy price cap covers around 15 million households and will ensure that consumers don’t pay more than is absolutely necessary this winter.
“Any customer worried about paying their energy bill should contact their supplier to access the range of support available.”
An Energy UK spokesperson added: “Suppliers are very aware that many customers will be facing a difficult time this winter and the immediate priority is protecting their interests while trying to minimise the disruption to the sector.
“This includes ensuring that the Supplier of Last Resort process can continue to successfully transfer customers of suppliers who have exited the market to a new provider. Suppliers are clearly facing a challenging time but are committed to providing as much support and help to customers as possible.
“The government, Ofgem and the energy industry will continue to watch the situation very closely.”
