Energy prices for millions of British households are set to soar from April after the energy regulator said it would increase its price cap by 54%, forcing the government to set out a new multi-billion-British pound package of support for hard-hit households.
Responding to record global gas prices last year, regulator Ofgem said the price cap would rise by 54% to 1,971 British pounds ($2,683) a year from April, the same month that taxes rise and general inflation is forecast to peak at 6%.
The Bank of England is also expected to say it is raising interest rates again at 12 p.m. GMT on Thursday.
Jonathan Brearley, chief executive of Ofgem, said the energy market had seen an unprecedented increase in global gas prices, a once in a 30-year event.
"Ofgem's role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas," he said in a statement.
Governments across Europe have spent tens of billions of euros trying to shield consumers from record high energy prices, either removing taxes or supporting the neediest, after gas and power prices spiked when economies reopened from COVID-19 lockdowns.
In Britain, a six-month price cap has limited the immediate impact on consumers, forcing the pain on to suppliers instead, with more than 25 going out of business since the start of 2021. Many had not hedged against future cost hikes.
Ofgem also said on Thursday it would look at changing how often it can update the price cap, to ensure it reflects the true cost of the market.
Unite, the country's biggest union, said the new price cap would turn the cost-of-living crisis into a catastrophe for millions of people. "This will plunge at least one in four families in Britain into fuel poverty," it said.
Ofgem said the new price cap was being driven by a record rise in global gas prices over the last 6 months, with wholesale prices quadrupling in the last year.
Those households who use prepay meters, often among the poorest, will see the cap rise to 2,017 British pounds.
Finance Minister Rishi Sunak will set out his response shortly. The Times newspaper reported that the government would provide state-backed loans to energy firms so they can lower bills for now, and recoup the costs when energy prices fall.
Craig Lowrey at Cornwall Insight said the move was not a viable long-term solution. "Any tools intended to reduce the immediate impact of these record high prices will mean that they are ultimately borne over a longer period," he said.
Analysts have warned that move looks risky as they currently see the price cap rising further at its next review in October, following a 330% rise in benchmark European gas prices last year.
Tony Danker, director-general of the blue-chip business group the CBI, said government action was "good news" but he worried about the long-term trajectory for the economy, and whether consumers could earn enough to cover bills.
Charity National Energy Action has warned that higher energy prices will likely push a further 1.5 million households into fuel poverty, meaning they are unable to afford to heat their homes to the temperature needed to keep warm and healthy.
"My question is really whether or not the economy is going to grow fast enough after this year for everybody to have the wage growth they need to cope with higher bills," Danker told Sky News.
"Let's see the detail. But I think this is a much more profound problem: how is Britain going to grow its economy and grow wages. The government's in a tough spot."
Analysts at Bank of America said the average Western European household spent around 1,200 euros ($1,355) on gas and electricity in 2020. British households spent an average of 1,370 euros a year on their energy, lower than German and French households at 1,526 euros and 1,406 euros respectively but higher than Italian, Spanish and Portuguese households.
