Household energy bills are set to rise again this autumn after Ofgem announced a 4% increase in its energy price cap, despite the Government removing VAT from domestic electricity bills.
From 1 October, the annualised bill for a typical household using gas and electricity and paying by direct debit will rise from £1,663 to £1,723 — an increase of £60 a year, or around £5 a month.
The regulator said higher wholesale gas prices, driven by continuing instability in the Middle East, were the main reason for the increase.
Prime Minister Andy Burnham’s decision to remove VAT from domestic electricity from October has limited the size of the rise, with Ofgem estimating that the headline figure would otherwise have been around £45 higher.
Energy price cap rises to £1,723
The new cap will apply between 1 October and 31 December 2026 and affects households on standard variable tariffs.
Ofgem estimates that around 20 million households are currently on standard variable tariffs, while approximately 11 million households are on fixed deals.
The £1,723 figure is not a maximum amount that households can be charged. The cap limits the unit rates and standing charges suppliers can impose, meaning the amount an individual household actually pays will continue to depend on how much energy it uses.
For customers paying by direct debit, the average electricity unit rate will rise slightly from 26.11p per kilowatt hour to 26.32p, while the average electricity standing charge will fall from 57.19p to 54.83p per day.
Gas will see a sharper increase, with the average unit rate rising from 7.33p per kWh to 7.97p. The average gas standing charge will increase from 29.04p to 29.68p per day.
Burnham VAT cut limits increase
The Government is removing VAT from household electricity bills between 1 October 2026 and 31 March 2027.
Electricity would normally be subject to VAT at 5%, while VAT will continue to be charged at 5% on domestic gas.
Ofgem said the tax change means electricity bills will remain broadly stable despite increases in underlying wholesale costs.
Without the intervention, the regulator estimates that the new typical household figure would have been approximately £45 higher.
The VAT reduction will also apply to customers on fixed electricity tariffs, with suppliers applying the discount automatically.
The Department for Energy Security and Net Zero said the measure would save households an average of £45 a year.
Gas bills rise by around 8%
Most of the October increase is instead being driven by gas.
Ofgem said gas bills are expected to rise by approximately 8%, while households that do not use gas are expected to experience an increase of less than 1%.
Wholesale energy prices have risen by 11% over the past three months, according to the regulator, with international gas markets remaining the dominant factor behind changes in household energy costs.
Ofgem attributed the increase to higher wholesale gas prices linked to the continuing conflict in the Middle East.
Fixed tariffs available below cap
Around 35% of households — approximately 11 million — are currently on fixed tariffs and will not be directly affected by the October price-cap increase.
Ofgem said fixed deals are available at £100 or more below the October cap and encouraged consumers to compare tariffs where appropriate.
The regulator also stressed that the headline price-cap figure represents the cost for a household using a typical amount of gas and electricity rather than a limit on an individual household’s annual bill.
Households using more energy will pay more, while those using less will pay less.
The October increase means Burnham’s VAT cut has prevented a considerably larger rise in electricity costs, but has not been enough to stop the overall typical dual-fuel bill increasing as international gas prices climb.