OFGEM is lowering its energy price cap – the amount suppliers are able to charge – from the current £4279 per year to £3280 for the average household, effective from April 1, it has announced.

The regulator said the reduction of almost £1000 reflects recent falls in wholesale energy prices.

However, domestic energy bills are still set to rise by an average of £500 a year despite the reduction as the Government’s support for households becomes more limited.

The £3280 figure indicates how much consumers on their energy suppliers’ basic tariff would pay if the Government’s Energy Price Guarantee (EPG) was not in place.

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But customers will pay about 20% more on their bills – approximately £500 – as the Government’s EPG becomes less generous from the beginning of April, leading to an average bill of £3000.

When the upcoming end of the £400 energy rebate scheme – paid in six instalments of £66 and £67 a month – is factored in, the energy cost for households will increase even more.

Ofgem chief executive Jonathan Brearley said: “Although wholesale prices have fallen, the price cap has not yet fallen below the planned level of the Energy Price Guarantee. This means that on current policy bills will rise again in April.

"I know that for many households this news will be deeply concerning.

“However, today’s announcement reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won’t make an immediate difference to consumers, it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease.

“If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower.

“However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of government support that is currently in place, this is a very tough time for many households across Britain.

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“Where people are struggling, we urge them to contact their supplier to make sure they are getting all the help and support they are entitled to. We also think that, with bills continuing to be so high, there is a case for examining with urgency the feasibility of a social tariff for customers in the most vulnerable situations.”

Citizens Advice chief executive Dame Clare Moriarty said the increase will “spell catastrophe” for millions of households without further support from the Government.

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She said: “Unless the Government changes course on planned reductions to the level of support for households under the Energy Price Guarantee, we estimate the number of people unable to afford their bills will double from one in 10 to one in five.

“The Government must keep the EPG at its current level of £2500. Recent drops in wholesale prices mean they have the headroom to do this. The alternative is millions more people unable to keep their house warm and keep the lights on.”

Commenting on the news, the SNP’s energy spokesperson Alan Brown said people across Scotland would be “scratching their head” at the price cap coming down but energy bills going up. 

“Jeremy Hunt must pass on the reduction in wholesale gas prices to consumers and bring down the government’s cap on bills to £2000 per year”, he said. 

Brown continued: “The UK Government will actually be spending less on the energy price guarantee because of the reduction in the Ofgem cap, so households should be seeing the impact of that on their energy bills. 

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“Instead, the Chancellor is planning on keeping the surplus whilst energy bills skyrocket again. 

“In a country as energy rich as Scotland, people should not be paying through the nose for their gas and electricity bills. 

“It is only because of decades of Westminster mismanagement of Scotland’s resources that this has happened.”

The Scottish Greens meanwhile said that the energy price hike would have a “devastating impact” and that it would force people to choose between “freezing and starving”. 

The party’s climate spokesperson Mark Ruskell said: “After a long cold winter, and at a time when costs are rising and inflation is biting, the last thing anyone needs is even higher bills, especially at a time when wholesale energy prices are falling. 

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“There can be no doubt about the impact this will have. If prices rise again then it will force even more people into destitution and poverty. 

“Amidst the misery, many of the oil and gas giants are celebrating record profits. Those obscene profits are being paid for by the suffering of millions of households. 

“It’s time to close the loopholes that have been built into the windfall tax and use it to lower bills and invest in the green technology  that we badly need to cut costs and our emissions.”