Average energy bills set to fall £238 a year from April

Energy regulator Ofgem has announced a significant reduction of the energy price cap for the second quarter of 2024.

The price cap changes mean that the average annual energy bill will fall £238 a year from April, this is its lowest level for two years.

The change means that the maximum rate per unit that can be charged to customers for their energy use, will fall by 12.3% on the previous quarter from 1 April to 30 June 2024. For an average household paying by direct debit for dual fuel this equates to £1,690, a drop of £238 over the course of a year – saving around £20 a month.

This will see energy prices reach their lowest level since Russia’s invasion of the Ukraine in February 2022 caused a further spike in an already turbulent wholesale energy market, driving up costs for suppliers and ultimately customers.

However, despite reaching this welcome milestone, Ofgem recognises that the cost of living remains high and many customers continue to struggle with their bills as standing charges rise and energy debt reaches a record figure of £3.1 billion.

Affordability remains the most significant issue, as people continue to struggle with bills over the last two years, which has led to record levels of energy debt.

To address this challenge in the short-term, Ofgem will allow a temporary additional payment of £28 per year (equivalent to £2.33 per month) to make sure suppliers have sufficient funds to support customers who are struggling. This will be added to the bills of customers who pay by direct debit or standard credit and is partly offset by the termination of an allowance worth £11 per year that covered debt costs related to the Covid pandemic.

Prepayment meter (PPM) customers will not be impacted by the extra charge, reflecting the fact that many do not build up the same level of debt as credit customers because they top up as they go.

Ofgem also confirmed plans to maintain the equalisation of standing charges across payment methods so that customers are not charged more depending on the payment method they use. Since October 2022 the so-called ‘PPM premium’ was removed by government support via the Energy Price Guarantee. However, with that support coming to an end on April 1, Ofgem has taken steps to provide a lasting solution, which must be funded by bill payers rather than tax payers, to maintain fairness in the system.

This means PPM customers will save around £49 per year while direct debit customers will pay £10 per year more.

Increasing network costs has also contributed to the rise in standing charges – and in anticipation of this we published a call for input in November 2023 and are currently reviewing more than 40,000 responses.

Ofgem is also publishing a decision to extend the ban on acquisition-only tariffs (BAT) for another 12 months, but intends to open a consultation to consider shortening this extension to just six months.

The BAT was introduced in April 2022 to provide more stability at the height of the energy crisis, removing often risky short-term discounted tariffs intended to attract customers from other suppliers.

As competition returns to the market, Ofgem is encouraging rising numbers of customers switching with a number of measures, including shortening the time suppliers are given to complete a customer transfer from 15 days to just five.

Additionally, from 1 April, the Market Stabilisation Charge – introduced in tandem with the BAT – will come to an end, meaning suppliers are no longer required to compensate a new customer’s previous supplier when they switch.

This influenced the regulator’s decision to temporarily extend the BAT rather than remove both safeguards at the same time, ensuring a phased and responsible return towards normality in the market while preventing a return of the risky behaviours which contributed to the high number of supplier failures during the energy crisis.

Ofgem is also publishing a decision following its wholesale adjustment review. Following unusually high volatility in wholesale prices between October 2022 and September 2023, the regulator examined whether suppliers experienced differences between wholesale costs and the allowances they were allowed to recover via the price cap.

However, after careful consideration the regulator has concluded to take no further action as wholesale costs did not systematically differ from allowances.

Jonathan Brearley, CEO of Ofgem, said “This is good news to see the price cap drop to its lowest level in more than two years – and to see energy bills for the average household drop by £690 since the peak of the crisis – but there are still big issues that we must tackle head-on to ensure we build a system that’s more resilient for the long term and fairer to customers.

“That’s why we are levelising standing charges to end the inequity of people with prepayment meters, many of whom are vulnerable and struggling, being charged more up-front for their energy than other customers.

“We also need to address the risk posed by stubbornly high levels of debt in the system, so we must introduce a temporary payment to help prevent an unsustainable situation leading to higher bills in the future. We’ll be stepping back to look at issues surrounding debt and affordability across market for struggling consumers, which we’ll be announcing soon.

“These steps highlight the limitations of the current system – we can only move costs around – so we welcome news that the Government is opening the conversation on the future of price regulation, seeking views on how standard energy deals can be made more flexible so customers pay less if using electricity when prices are lower.

“But longer term we need to think about what more can be done for those who simply cannot afford to pay their energy bills even as prices fall. As we return to something closer to normality we have an opportunity to reset and reframe the energy market to make sure it’s ready to protect customers if prices rise again.”

StepChange Debt Charity says that, despite the announcement that the energy price cap will drop to £1,690 a year from April, support for households will still be necessary as they struggle with record levels of energy debt. The charity says that targeted write-offs are essential for those who can’t afford to repay energy debt that has risen to a record £2.9bn. Richard Lane, Chief Client Officer at StepChange Debt Charity, said “While it’s positive to hear that energy bills will fall from April, it’s important to bear in mind that the price cap will still be more than 60% higher than before the cost of living crisis. We can also see the lasting impact that high energy prices have had on our clients. Over the course of last year, the average amount of energy arrears per StepChange client deepened by 27% from an already staggering £1,608 in January to £2,050 in December 2023.

“Considering two years of sky high rents, rising mortgage rates and food inflation, the picture is still incredibly difficult for millions of households, and the prospect of repaying energy debt while keeping on top of everyday essentials is simply insurmountable for many.

“The Government should continue support for low income households, as headline indicators like the price cap and inflation falling don’t reflect the reality for many of those struggling with energy costs. The upcoming Spring Budget is a crucial opportunity to help households move out of the red and onto a more sustainable footing. We need to see the Household Support Fund extended, which provides essential crisis support, alongside funding to write off energy arrears for those who cannot afford to pay. This should be followed by the introduction of a social tariff for energy as soon as possible to stop unaffordable bills driving debt among struggling households.”

Alastair Douglas, CEO of TotallyMoney said “In their own words, Ofgem’s job is to ‘work to protect energy consumers, especially vulnerable people, by ensuring they are treated fairly’ — but one in ten people are struggling to keep up with their bills, and half have turned off their heating, even when cold.

“And at the same time, the regulator has reversed the banning of the force-fitting of prepayment meters, raised the price cap, and changed rules which have brought boom times for big energy companies who’ve announced record profits.

“The price energy cap has become an energy price fix. Competition in the market is almost non-existent, and most tariffs set by providers are charging the maximum. And while new offers which undercut the cap are slowly entering the market, would-be customers are being slapped with £150 exit fees per fuel, pushing penalties up to an eye-watering £300.

“So while April’s cut to the price cap is a step in the right direction, Ofgem needs to step up and protect the people it’s supposed to serve. Otherwise, we’ll continue to see heating costs burning a hole in people’s pockets, while energising big energy firm profits.”

Joanna Elson CBE, Chief Executive of Independent Age said “While today’s price cap announcement shows that energy prices are going down from April 1st, worryingly energy bills will still be around 60% higher than they were in 2021. Millions of people across the country are still struggling to afford their energy bills including older people living on a low income. Our helpline continues to hear from frightened and anxious people who are being forced to make drastic cutbacks such as washing less or sitting in darkness. This is not acceptable.

“Gas unit costs are still 73% higher than they were in winter 2020/21 and electricity unit costs are up by nearly 100%. Older people living in financial insecurity, who are often reliant on a fixed income, cannot keep up with these increases. In the long term, people living in poverty, or on the edge, need reassurance that they will be shielded from high energy prices.

“The UK Government must introduce an energy social tariff for those most in need, including people aged 65 and over on a low income and those who have high energy consumption due to long term conditions or disabilities. This sustainable solution would offer protection for people in later life living on low incomes. With the Spring Budget approaching, now is the time for action.”