The regulator of the energy industry in the UK, Ofgem, has announced the lowering of their price cap in October. This is good news for around 11 million households, who will see lower energy bills this winter. Another 4 million will benefit from a separate cap on pre-paid energy meters. The new energy price caps will take effect from 1st October 2019 to 31st March 2020.
How does the energy price cap work?
Ofgem introduced the price cap back in January this year in an attempt to prevent energy companies from ripping off customers with expensive energy bills. The cap aims to prevent overcharging by only allowing suppliers to make £21 of profit per average energy bill. If the cost of supplying energy goes down, then the price cap requires the suppliers to pass the savings on to their customers. Ofgem is lowering the cap to reflect the falling costs of the energy market. They intend to review the cap every 6 months. After 2020, Ofgem will decide annually if the price cap should continue up until 2023. The price cap does not affect energy bills for customers on fixed tariffs. It only protects customers with pre-payment meters or default or standard variable tariffs, as well as those who receive the Warm Home Discount.
How much cheaper will energy bills be with a lower price cap?
From October, the average annual household energy bill is due to fall from £1,254 down to £1,179. This would be a saving of £75. Separately, annual pre-payment meter energy bills should drop from £1,242 to £1,217 for this period. The average bill will decrease by around 6% from October under the new price cap. However, customers should bear in mind that the price cap does not actually limit their total bill. It limits the cost per unit of energy. This means that you will still have to pay according to the amount of energy that you use. And even with the average savings, you could save more by switching deals or suppliers. Energy providers such as E.ON are already adjusting their prices to the maximum below the cap, but these are not actually the cheapest tariffs that they offer. If you do make any savings from the price cap, they won’t be immediately obvious, especially if you pay for your energy by Direct Debit.
Will some energy bills increase even with the lower price cap?
Before you get excited about having a bit of extra cash thanks to the price cap reduction, maybe consider the savings that you could make by switching tariffs completely. The price cap is not the cheapest tariff available by any means. Fixed-term tariffs can cost hundreds of pounds less per year. In particular, households with pre-payment meters will receive fewer savings and find it harder to switch. Due to the higher costs of operating the pre-payment meters, these customers will now be paying more on average than customers on standard tariffs. In the end, costs for pre-payment energy users are likely to rise instead, by £1 a week. Most customers will see a reduction from the new price cap, however small, but not everyone will. Those who will be negatively affected should receive a letter from the supplier to explain.
Which energy providers are exempt from the price cap?
It turns out that the price cap will not affect all energy tariffs that would be otherwise eligible. A problem with the price cap is that it assumes that providers offer a range of tariffs, with the standard tariff being the most expensive one of all. There are actually around a dozen energy companies which only offer one tariff. In these cases, the tariff usually depends on wholesale energy prices, so the suppliers are not trying to exploit customers. In addition, most of these tariffs are cheaper than the price cap anyway. However, not all of them are cheaper, and this is due to the differences in prices regarding green energy. Taking into account the additional costs involved in renewable energy, Ofgem is allowing some energy companies to ignore the price cap. These are Green Energy UK, Good Energy Limited, and Ecotricity. The only way that you should be paying more than the price cap is if you choose to pay more for green energy.
How is the price cap affecting energy companies?
Energy market giants British Gas and SSE have issued profit warnings since the introduction of the price cap, losing £176 million to £300 million. They are having to cut jobs and reduce shareholder dividends as a consequence. The price cap is also likely to make it more difficult for small energy companies to challenge the Big Six. Several small suppliers have gone bust in recent years after offering unsustainably low tariffs to compete in the energy market. This is the opposite of the healthy competition that Ofgem aims to encourage. For this reason, many energy providers are calling for the government to scrap the price cap. Some of them think that a benchmark guiding price would be more beneficial for everyone than a mandatory cap.
Will Ofgem extend the price cap?
At the moment, Ofgem is only enforcing the price cap into 2020. They are being encouraged to extend it beyond this, which will they decide to do or not on an annual basis following their next review. The price cap is due to be lifted in 2020 because the Competition and Markets Authority predicted that smart meters would have finished rolling out by then. However, this is behind schedule, so pre-payment meter customers still need the protection of a price cap.