Will energy bills go up or down in 2025 and is it worth contracting a fixed tariff?

Energy bills may have fallen from the record highs seen in 2021, but households are still paying an average of £1,717 a year for gas and electricity, with little relief on the horizon.

That £1,717 figure is the typical level of Ofgem’s price cap, which sets the energy bills of 27 million homes (around 90 per cent of the country’s households).

This rate applies to a home with average energy consumption, at a variable energy rate and paid by direct debit.

The immediate future for energy bills is bullish, as the maximum price will increase in the new year.

But what is the future for energy bills through 2025 and when can struggling households expect prices to finally fall?

How much will energy bills increase in 2025?

The typical energy bill will rise by 1.2 per cent on January 1 to £1,738, according to regulator Ofgem.

That rate will last three months, until the maximum price is reset again in April and October.

Ofgem does not make predictions about the future of the maximum price. However, the experts at Cornwall Insight do.

Cornwall believes the average bill will rise to £1,782 from April 2025, or 2.5 per cent.

Of this, £896.92 would go towards electricity and £864.68 towards gas, for typical use.

April’s energy bill increase would reflect turmoil in energy markets and the additional cost of regulatory change over gas and electricity in the UK, Cornwall said.

Later in the year, Cornwall Insight believes the price cap will “fall slightly in April 2025 and again in October 2025” but has not published exact predictions.

Energy company EDF believes the typical price-capped bill will rise to £1,754 in April, an increase of 1 per cent.

Why are energy bills so high?

There is a complicated web of reasons why energy prices are much higher than they were before.

The main culprit was the Russian invasion of Ukraine, which caused energy prices to skyrocket. Russia supplies much of Europe’s gas, oil and coal, and concerns about availability have sent prices soaring.

While the UK did not import much fuel directly from Russia (around 4 per cent of gas use in 2021), it does import around 40 per cent of its energy.

The UK was then forced to buy this energy on the open market against competing countries, driving up the price for everyone.

The high cost of buying wholesale energy led dozens of UK energy companies to collapse. These companies were forced to sell energy to consumers at a price much lower than what it cost them to buy it, thanks to most households having fixed-rate energy bills.

Not only did the new fixed rate energy deals disappear completely, but the cost of all bankrupt energy companies was factored into all energy bills.

Since then, Ofgem regulation has also helped keep bills high. This includes prohibiting energy companies from undercutting each other’s prices and delaying smart meter retrofits.

The cost of electricity is also increased by a pricing system called “marginal pricing”, which often sees the cost of all energy charged at the higher cost of gas rather than the cheaper cost of renewable energy.

The way electricity works in the UK is like a market. At the beginning of the day, all electricity suppliers (renewable energy, nuclear and gas) calculate how much it will cost them to produce a single unit of electricity. This reset occurs every half hour.

Those estimates are then compared to consumer demand and the sources with the cheapest prices are told to start generating electricity first.

In practice, that usually means renewables like wind and solar go first, then nuclear, then gas. This is because generating renewable energy is much cheaper, as long as the sun shines and the wind blows.

The problem with marginal pricing is that if gas is used, then all wholesale electricity is priced at the highest gas rate, regardless of how much it costs to generate or how much gas is used to generate electricity.

Even if only 5 per cent of the UK’s electricity comes from gas-fired power stations at any given time, the price of that gas is used to set the wholesale price for the remaining 95 per cent of the electricity.

When power companies buy that energy in bulk and sell it to consumers, this is one of the things that inflates the final cost and price of consumers’ electricity bills.

When will energy bills go down?

Energy bills are unlikely to return to historic levels for years, Cornwall Insight thinks, perhaps until the end of the decade.

The company believes that energy prices will not change much until 2027/28, and then will begin to fall due to the deployment of more renewable energy.

Can I sign up for a fixed rate energy offer and save money?

Households can go over the limit and save money by taking out a fixed rate energy deal.

At the moment, most energy agreements are variable. That means they change prices, usually four times a year when Ofgem adjusts its price cap.

Fixed tariffs, as the name suggests, offer fixed prices for unit rates (the energy used) and standing charges (daily rates paid regardless of the energy used).

Before the 2021 energy crisis, most energy deals were fixed-rate, with variable rates reserved for households that had abandoned a fixed deal and not taken out a new one.

But fixed rate deals are back and if you can find one cheaper than the maximum price, you can save money on your energy bills.

Not all homes will be eligible for a fixed rate deal and the exact price paid will vary depending on energy usage.

Additionally, many cheaper fixed-rate energy deals are not available on the open market and are offered to customers directly by their energy company.

Energy companies are free to sell these solutions only to their own customers, without revealing these rates to the rest of the world.

If your energy company contacts you about a dedicated fixed rate, check how the price compares to what you pay now and what you would pay in January when the maximum price changes.