Energy price cap falls but bills still expected to rise

Energy regulator Ofgem has announced that the energy price cap will be set at an annual level of £3,280 for a dual fuel household paying by direct debit based on typical consumption, a reduction of almost £1,000 from the current level, of £4,279 which reflects recent falls in wholesale energy prices. The cost of universal energy support – delivered through the Energy Price Guarantee (EPG) – and is likely to fall by 90 per cent next year to £1.4 billion, says the Resolution Foundation.

The level of the price cap will not affect consumers as it is above the level of the EPG, which is due to rise to £3,000 in April. Based on current market pricing, the price cap is set to fall below the level of the EPG from July onwards as big falls in wholesale gas prices since last summer finally feed through into lower household bills.

As a result, the cost of the EPG in 2023-24 – which will only likely apply between April and June this year – is set to be just £1.4 billion, 90 per cent lower than the £12.8 billion forecast made at the Autumn Statement.

But while the cost of energy support is falling, energy bills for households are set to rise sharply this spring.

The Foundation notes that the scaling back of the EPG and removal of £400 universal bills support in April will cause energy bills to jump by 20 per cent for households on pre-payment meters (PPMs). Despite warmer weather anticipated from April, those on PPMs are set to see their monthly bills in April rise from £202 to £247.

In order to avoid an unwanted spike in energy bills, and reduce the risk of a recession in the near term, the Chancellor should delay the scaling back of the EPG until July, says the Foundation. This policy, costing around £3 billion, would have the additional benefit of reducing inflation by a further one percentage point from April.

Emily Fry, Economist at the Resolution Foundation, said “The latest Ofgem price cap is a stark reminder of the lag between falling wholesale gas prices, and falling household energy bills. While consumers won’t have to face typical bills of £3,280 this Spring, many are still set to see bills rise by a fifth as government support is scaled back.”

“The Chancellor should prevent this coming energy bills spike by maintaining the level of the EPG at £2,500 for a further three months.”

Ofgem CEO Jonathan Brearley said “Although wholesale prices have fallen, the price cap has not yet fallen below the planned level of the Energy Price Guarantee. This means, that on current policy, bills will rise again in April. I know that, for many households this news will be deeply concerning.”

“However, today’s announcement reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won’t make an immediate difference to consumers, it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease. If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower.”

“However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of government support that is currently in place, this is a very tough time for many households across Britain.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “The energy price cap has plummeted a massive £999, revealing that the energy price guarantee isn’t going to be anywhere near as expensive as was originally feared. This provides the government with an opportunity to consider more tailored support in the Budget.”

“It’s going to feel particularly unfair in April when the energy price guarantee jumps by a fifth, to £3,000 – at a time when the wholesale price of gas is on the way down. To make matters worse, the ending of the universal monthly support payments at the same time, will mean there’s even less cash to go around.”

“Already almost half of us (47%) are finding it difficult to pay our energy bills, and 6% of people have fallen behind. In January around 9,500 people approached Citizens Advice for help with fuel debts – a number that has doubled in three years. A fifth of people asking the charity for help with debt are behind on fuel bills – making it the most common form of debt problem. Hiking prices in April is going to make life even more impossible for those who are already struggling.”

“The falling wholesale price of energy offers an opportunity for the government to consider more help, particularly targeted at those who need it the most. One sensible option would be to introduce a social tariff for those on lower incomes, which charities have been pushing for. Given that this could take some time to introduce, the government could continue making monthly payments to those on lower incomes in the interim.”

Richard Neudegg, Director of Regulation at Uswitch.com, said “This significant fall in the Ofgem price cap should mark a turning point for the energy market, and could be the last quarter in which the cap is priced above the current Energy Price Guarantee level. Yet, with the Energy Price Guarantee still set to rise by 20% to £3,000 a year for average consumption and the end of the £400 Energy Bills Support Scheme, households will be facing higher bills from April.”

“Wholesale prices have dropped more than 50% since December 2022 but consumers have yet to feel the benefit. Now is the time for fixed deals to return to the market to get the benefits of falling wholesale prices to consumers as soon as possible. After 18 months of sky-high energy bills, households need stability as well as choice in who their energy provider is and what they pay.”

“A return to fixed deals will bring the benefits of competition back to the market, giving consumers the chance to vote with their feet and choose a supplier with the best deal and customer service, as well as locking in more price certainty.”

“Current intervention, including the market stabilisation charge implemented by Ofgem, is actively dissuading suppliers from offering competitive deals that consumers desperately need.”