Ofgem has announced that the energy price cap for customers on default (including standard variable) tariffs, introduced on 1 January 2019, will increase by £117 to £1,254 per year, from 1 April for the six-month “summer” price cap period. The price cap for pre-payment meter customers will increase by £106 to £1,242 per year for the same period.
Using published methodologies, Ofgem adjusts the level of the caps twice a year to reflect the estimated costs of supplying electricity and gas to homes for the next six-month period. Ofgem will reset the level of the cap in August for the six-month winter price cap period which begins on 1 October.
Capped prices only increase when the underlying cost of energy increases. Equally when costs fall consumers’ bills are cut as suppliers are prevented from keeping prices higher for longer than necessary.
The caps will continue to ensure that the 15 million households protected pay a fair price for their energy because the rises announced today reflect a genuine increase in underlying energy costs rather than supplier profiteering.
When the default tariff price cap was introduced on 1 January, suppliers were forced to scrap excess charges of £76 per year on average per default tariff customer and the cap stops this overcharging from returning.
Ofgem analysis suggests that default tariff customers could be paying around £75 to £100 a year more on average for their energy had the default tariff cap not been introduced even after today’s increase.
Around £74 of the £117 increase in the default tariff cap is due to higher wholesale energy costs, which makes up over a third (£521) of the overall cap. Higher wholesale energy costs have similarly pushed up the level of the pre-payment meter cap.
Last year higher oil prices, amongst other factors like the higher demand for gas from the ‘beast from the east’, led to a rise in wholesale gas prices. Because of the importance of gas as a source of electricity generation, this also led to higher wholesale electricity prices.
While the prices of wholesale energy contracts used for calculating the cap have fallen in recent months, overall these costs remain 17% higher than the last cap period (see wholesale energy charts below).
Other costs, including network costs for transporting electricity and gas to homes and costs associated with environmental and social schemes (policy costs), have also risen and contributed to the increase in the level of the caps.
Customers who are paying a fair price thanks to the caps can save more money on their energy bills by switching to a better deal.
Dermot Nolan, chief executive of Ofgem, said “Under the caps, households on default tariffs are protected and will always pay a fair price for their energy, even though the levels will increase from 1 April. We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering.”
“Alongside the price caps, we are continuing to work with government and the industry to deliver a more competitive, fairer and smarter energy market that works for all consumers.”
Commenting on the energy price cap rise, Gillian Guy, Chief Executive of Citizens Advice, said “Unfortunately price rises were inevitable as the cost of supplying electricity and gas to our homes has been increasing. As unwelcome as this news is, it’s likely that prices would be higher still without the cap and there are steps people can take to ease the strain on their bills.
“There are big savings to be made by switching supplier or tariff. Simple steps like topping up your insulation, or installing better heating controls, can permanently reduce your bills and make your home more comfortable.”
Peter Earl, Head of Energy, comparethemarket.com, said “The revised price cap level will shock people and usher in a spring of discontent for millions when it comes into force on 1st April. A rise was expected, but a hike of £117 represents a brutal hit to households on variable and default tariffs. Many people would expect the price cap to protect them against price rises, perhaps not appreciating the fact that the level of the cap will move to reflect changes in the wholesale energy markets. This increase is a reminder that as Ofgem continues to review the cap, there could be more rises to come in the future. The reality is that the price cap, while well-intentioned, will not save people from price hikes – people still need to take control of their own energy provision to have the best opportunity of making savings.
“There is little doubt that energy providers will most likely immediately raise their prices to just below the new limit, adding extra pain on people already paying over the odds for their energy. Recent research we’ve conducted shows that 60% of fixed rate tariffs are below the current price cap – this percentage share will possibly rise significantly when the new price cap level comes into force. The message is clear – shop around and move to a competitively priced fixed tariff or face an inertia tax of around £117 on your annual bill.”