The energy regulator has lowered winter energy bills for 15m UK homes by reducing its energy price cap to record lows after wholesale energy market prices tumbled during the coronavirus pandemic.
Ofgem will lower the cap on default dual-fuel energy tariffs for 11m households by £84, from an average of £1,126 a year to a record low of £1,042 from this October. It will also lower the cap on energy bills for customers using pre-payment energy meters by an average of £94 a year, from £1,164 to £1,070 a year.
The energy price cap will fall to its lowest level since it was introduced in January 2019 after the impact of the Covid-19 pandemic slashed demand for energy, causing gas and electricity market prices to fall to historic lows.
Ofgem adjusts the cap on energy bills every six months to ensure fair energy bills, which reflect energy company costs. These have fallen steeply because of the lower cost of buying gas and electricity from the wholesale markets in advance.
However, Ofgem’s cuts fall short of industry forecasts, which had suggested a cut of at least £85 and up to £100 a year for standard variable energy tariffs. The cap may also begin to rise again from next April in line with the gas market’s recovery, Ofgem warned.
Energy market prices tumbled to 20-year lows during the Covid-19 lockdown, despite households using more energy while staying at home, after energy-hungry factories, offices, schools and restaurants shut. As lockdown restrictions ease, gas market prices are beginning to rise, which could lead to higher bills next spring.
How does the energy price cap work?
The cap, one of the biggest shake-ups of the energy market since privatisation, came into effect on 1 January 2019 for 11m households on default tariffs, known as standard variable tariffs (SVTs). The government told the energy regulator, Ofgem, to set the cap because ministers argued people on SVTs were being ripped off by big energy firms capitalising on consumer loyalty. The limit is not an absolute one but the maximum suppliers can charge per unit of energy and for a standing charge. There is a separate cap for 4m homes on prepayment meters.
So why are prices moving higher?
In short: if energy market prices climb higher, the cap must move higher, too. The cap is designed to reflect the costs energy suppliers face, the largest of which is sourcing gas and electricity from the wholesale markets. In recent months energy markets have reached historic highs because of tight global gas supplies, causing one of the steepest energy price increases on record. Market prices have continued to climb since the new cap was announced, meaning another rise is likely in April once the regulator has revised its cost assessments.
Is there any way to avoid the increase?
In the past, households could save hundreds of pounds a year by spending a few minutes on one of the many comparison sites, or by signing up to an auto-switching service, and moving to a cheaper tariff, either with their existing supplier or a rival one. But the recent market surge means even fixed tariffs, which are not covered by the cap, are more expensive than the energy price cap itself. The best bet to keep bills in check is to use less energy: if you can afford to invest in insulation this can make a major difference to how much energy you need. Lowering the thermostat by a couple of degrees may also be an option for some.
When will bills begin to fall again?
It is too soon to say. Energy market experts believe gas and electricity wholesale prices will remain high through the winter and into 2022 because energy demand is recovering rapidly after the worst of the Covid-19 crisis. Some believe households may face rising energy bills for another 18 months. In addition to market prices, the regulator includes the cost of using energy networks and paying for government policies – which are also expected to keep rising.
Jillian Ambrose
Jonathan Brearley, the chief executive of Ofgem, said: “Millions of households, many of whom face financial hardship due to the Covid-19 crisis, will see big savings on their energy bills this winter when the level of the cap is reduced.
“They can also reduce their energy bills further by shopping around for a better deal. Ofgem will continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy market.”
The cap was introduced in early 2019 at the insistence of government ministers, who feared the low numbers of customers switching between established energy companies could lead to higher bills and unfair energy company profits.
Kwasi Kwarteng, the energy minister, said the government was “working hard to ensure consumers pay a fair price for their energy” through the coronavirus pandemic. The government had earlier this year called on energy companies to support the most vulnerable customers, he said, and set up a £2bn Green Homes Grant scheme “to help households become warmer and their bills cheaper this winter”.
The government has legislated that the cap should remain in place at least for 2020, and no later than 2023, provided the energy market had become more competitive. Ofgem is expected to review the market by the end of this year and has said the cap should not be lifted until the end of 2021.
Ed Dodman, a director at the Energy Ombudsman, said the price cap cut was a “much-needed financial boost for millions of households, at a time when many people are struggling due to the economic impact of Covid-19 and lockdown”.
However, many cash-strapped households could make far larger savings to their energy bills by switching from a standard variable tariff to one of a growing number of cut-price fixed-term deals.
Robert Buckley, of Cornwall Insight, said the difference between the costliest deals on the market and the cheapest stood at £562 at the end of last month, meaning a “notable gap will remain”, even after Ofgem reduced the cap.
“Today’s announcement should be used as a catalyst for customers to check their tariff to see if they are on the best possible deal,” he said. “This is especially important as next time the price cap is reset for April 2021, we could well see rises offsetting as much as half of the falls announced today.”
The energy ombudsman cautioned households to consider the customer service credentials of energy companies, as well as their tariffs. “Of course price matters, especially at the moment, but customer service is important, too,” Dodman said.
