Oxford | E+ | Getty Images

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 more than £700 a year.

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.

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.

Several of the U.K.’s 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. 

Britain’s government is expected to step in to ease pressures brought about by rising fuel bills, the BBC reported on Wednesday, by lending to energy firms so that they can pass savings on to their customers.

Bullen warned that such a plan would force energy suppliers into debt in order to compete.

“It’s starting to look very much like supplier bailouts, and that’s where the alarm bells are ringing,” he told CNBC. “It’s relatively easy for [Prime Minister Boris] Johnson to give away billions in loans, but when does it get paid back? What happens if energy prices stay high next year? How do we ensure that the companies that have taken out these loans are actually still around and capable of paying these loans back?”

He argued that the only way of ensuring companies don’t collapse before they can repay the government is to shut down competition by preventing customers from switching supplier.

“Customers are then going to have inflated bills and they’re not going to be able to get the benefit of a competitive market,” Bullen said. “[The loan scheme] has been rushed. It’s not been consulted on and I honestly think we’re going to live to regret it.”