• The U.K. has limits on how much suppliers are able to charge consumers for energy.
• Britain's energy price caps are reviewed by the government's regulator, Ofgem, every six months.
• Ofgem, the energy sector regulator, said on Thursday that its price cap would be raised by 54%, marking a record-breaking increase.

LONDON — Energy bills are set to rise drastically in the U.K. after the country's energy regulator announced its cap on prices would rise by over 50% in April.

The U.K. has limits on how much suppliers are able to charge consumers for energy, with price caps reviewed by the government every six months.

Ofgem, Britain's energy sector regulator, said on Thursday that its price cap — under which the average household's annual energy bill is currently between £1,277 ($1,730) and £1,370 — would be raised by 54%, marking a record-breaking increase.

That means many households could see their energy bills rise by around £700 a year.

An estimated 22 million households will see their energy costs increase, Ofgem said.

"The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and 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," Jonathan Brearley, CEO of Ofgem, said in a statement on Thursday.

"Ofgem is working to stabilize the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future."

Wholesale natural gas prices reached record highs in Europe last year, caused by a number of issues including low inventories and Russia tightening its gas supply to the EU, creating an energy crisis across the region that many countries are still grappling with.

But the U.K. has been hit particularly hard due to its heavy reliance on gas as an energy source.

British Finance Minister Rishi Sunak announced on Thursday that all residential electricity customers would receive a £200 discount on their electricity bills from October, which will later be repaid in £40 installments over five years.

He also announced that the majority of households would be given a £150 rebate on their council tax — a levy paid by households based on the value of their home.

Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said in a note following Ofgem's announcement that Pantheon now expected Britain's electricity and natural gas consumer price indexes to rise by 39% month-to-month in April.

"This would mean that their combined contribution to the headline rate of CPI inflation will rise to 1.6 percentage points in April — 0.1 pp below our previous expectation — from 0.7 pp in March," he said. "We continue to expect CPI inflation to peak at about 6.5% in April."

More than 22 million British households are connected to the country's gas grid. Britain's largest single source of gas is the U.K. Continental Shelf, which made up around 48% of total supply in 2020. However, the UCS is a mature source, meaning it must be supplemented with gas imported from international markets.

U.K. day ahead prices for wholesale natural gas were trading at around £1.75 per therm on Thursday, up slightly from the previous day. Meanwhile, front month contracts gained around 3% to trade at around £1.89 per therm.

Day ahead prices peaked in December, when they rose above £4.50 per therm.

Almost 30 U.K. energy suppliers collapsed last year thanks to the soaring cost of wholesale gas, with those that have managed to survive the crisis urging the government to remove or raise the price cap.

Bill Bullen, founder and CEO of British energy supplier Utilita, told CNBC in a phone call on Thursday that he had "huge concerns" about what might come with the next price cap review, which would impact prices next winter.

"That's when these extra energy costs are really, really going to hit home," he warned.

However, the prospect of rising energy bills have been concerning consumers and businesses in the U.K. for several months, with many small business owners worried that rising fuel costs could mean their companies can no longer afford to operate.

The U.K. is also facing a wider cost of living crisis, with inflation soaring to a 30-year high in January.

Taxes on earned income and shareholder dividends are also set to increase by 1.25% from April, a move which Prime Minister Boris Johnson is reported to be pushing ahead with despite pressure to U-turn from lawmakers within his own party. 

'RIP the self-employed'

Kerry Mackay, owner of Welsh sustainable sponge manufacturer ScrubbiesUK, said via email that the sharp price rise had dealt "a massive blow to businesses and people around the U.K.," adding that she wrapped herself in a blanket as she worked to keep her energy bills down.

Meanwhile, Malcolm Baker, who breeds and sells exotic frog species, said the price cap increase "is going to kill small businesses."

"RIP the self-employed and sole traders," he said. "Such a massive rise will hit the pockets of lower income families and those who, like myself, are disabled and need to have constant heat in the home ... It's go hungry to stay safe."

Adam Bamford, CEO of Derby-based Colleague Box, said the speed of price rises had "blown us away as a business."

"We took action over the new year to reduce the size of the sales team, which gives us some headway with costs, but it will have a long-term impact on our growth as less people equals less income," he said in an emailed statement. "At the moment I don't feel the Government could care any less about businesses."