Energy regulator Ofgem has announced its price cap measures which it says will benefit over 11 million more households on poor value default tariffs and protect them from being overcharged.
The announcement follows Parliament passing the Government’s Domestic Gas and Electricity (Tariff Cap) Act, which became law on July 19 and gives Ofgem a duty and the powers to put the price cap in place. Ofgem is working to have the cap in place by the end of the year.
When the price cap is introduced suppliers will have to cut their prices to the level of or below the cap, proposed to be £1136 per year for a typical dual fuel customer paying by direct debit, forcing them to scrap excess charges for people on poor value default deals.
The exact savings each individual household would make will depend on the price of their current deal, how much energy they use, whether they have both gas and electricity and how they pay for their energy.
The cap would save consumers who use a typical amount of gas and electricity around £75 per year on average. Many consumers on default deals use more energy than a typical household so their savings would be higher, while those who buy their electricity and gas from different suppliers would also save more. A typical consumer on the most expensive tariffs would save over £120. In total, the price cap would save consumers around £1 billion.
Dermot Nolan, Chief Executive of Ofgem, said: “Ofgem has made full use of the powers Parliament has given us to propose a tough price cap which will give a fairer deal to consumers on poor value default tariffs.cOnce the price cap is in place, all households in Great Britain covered by the cap will be protected from being overcharged for their energy. Consumers can have confidence that falls in energy costs will be passed on to them and if costs increase, Ofgem will ensure that any rise will be due to genuine increases in energy costs rather than supplier profiteering.”
“Households protected by the cap will be able to save even more money by shopping around for a better deal. Meanwhile, Ofgem will continue with reforms which aim to deliver a more competitive retail energy market which, combined with protection for those who need it, works for all consumers.”
Ofgem will update the level of the cap in April and October every year to reflect the latest estimated costs of supplying electricity and gas. This ensures households who are covered will always pay a fair price for their energy.
The price cap is designed to be a temporary measure, in place until 2023 at the latest. This will allow Ofgem to put in place further reforms to make the energy market more competitive and work better for all consumers, including making switching energy supplier easier, quicker and more reliable.
Commenting on Ofgem’s energy price cap proposals, Rachel Reeves, Chair of the Business, Energy and Industrial Strategy Select Committee said “The energy price cap is long overdue. The Big Six energy companies have been ripping off their customers for far too long and the price cap is a crucial step in helping to fix our broken energy market. It’s vital that Ofgem get on and implement this cap by Christmas so that long-suffering energy customers can benefit from this vital protection. The Big Six energy companies have resisted these reforms every step of the way and customers should continue to shop around because sadly we can’t rely on our energy suppliers to give us a good deal.”
Gillian Guy, Chief Executive at Citizens Advice, said “A cap on standard variable tariffs is an important step in the right direction, and one that Citizens Advice has repeatedly called for. While the price cap should save people on standard variable tariffs money, people should still be able to find a better deal on their energy bills by shopping around.”
“A cap on default tariffs is a good start in tackling the cost of being a loyal consumer. We’d like to see the government take action on the equally unfair loyalty penalties which exist in other markets, such as mobiles, broadband and insurance. Citizens Advice has found that these can cost people up to £1,000 a year.”
Georgie Frost, consumer advocate at GoCompare Energy, said “Today’s announcement sends the wrong message, at the worst possible time. We are about to go into winter – the season of the biggest energy bills – after a period of unprecedented energy price rises and with 11 million households still sitting on expensive standard variable tariffs. “It’s good that the government have energy firms and bills within their sights, but it is important to remember that this is only temporary, it’s a sticking plaster. I hope they don’t put their feet up after this and think ‘job done’. It’s far from done. Policymakers need to continue to promote the switching revolution which has been gathering pace over the last couple of years. We need to maintain that momentum and encourage more households to take control of their bills, rather than just accept this handout.
“For people who can’t or won’t switch to a better deal, this will save them £75 a year on average. Whether that means they will be paying a ‘fair’ price for their energy is still very debatable. Since the latest round of energy price increases began in March 2017, the big energy companies have all raised their dual fuel standard tariffs by more than £75. Therefore, even with the cap, most households still on a standard tariff will be worse off than they were 18 months ago.
“The downside of the cap is that millions of households could think ‘job done – I’ve saved money on my energy bills’, when in reality, they are still paying far too much.”
Peter Earl, Head of Energy, Compare the Market, said: “”A price cap of £1136 will only protect UK households from the worst excesses of standard variable tariffs. We believe passionately that no one should be stuck on poor value tariffs and it is right that the government is trying to protect those at the sharp end of rip off energy prices. However, the price cap is only a sticking plaster and will not repair the fundamental failings within the energy market.”
“The biggest danger of the price cap is that it will lull people into thinking that they never have to engage with their energy provider again. More than a fifth (22%) of those we asked say that the introduction of a price cap would result in them being less likely to switch provider. It is vital that the regulator, Ofgem, makes it very clear that the price cap is a temporary solution and that people will still most likely only get the best deals by shopping around for fixed tariffs.
“There is concern that the price cap will make energy more expensive. More than half of UK adults think the average cost of energy will increase post price cap, as energy companies raise the prices of their best value tariffs in order to offset the impact of the price cap. We are concerned that engaged energy shoppers will suffer, paying an inertia tax to subsidise households stuck on standard variable tariffs. This may be the great unintended consequence of the price cap.”