Gas and electricity bills will fall for about 15m households this summer after the energy regulator, Ofgem, reduced its price cap on standard bills in response to falling global energy markets.
The price of the average dual-fuel energy bill will fall by £17, from £1,179 to £1,162, for 11m households that use a standard variable energy tariff to buy their energy. There will be a similar cut for the 4m homes that have a prepay meter, with the average price of gas and electricity to fall from £1,217 to £1,200.
Ofgem has lowered the cap, which is designed to guarantee a fair price for energy customers, in line with the falling price of gas and power on the wholesale energy markets. It will take effect from 1 April and remain in place for six months.
The energy minister Kwasi Kwarteng said: “The price cap is saving the average bill payer between £75 and £100 per year, helping everyone get through the cold weather without worrying about costs.”
Ofgem’s new chief executive, Jonathan Brearley, said the cap had saved households about £1bn since it was introduced at the beginning of last year but energy billpayers could make bigger savings by “shopping around for a better deal”.
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
Cheaper fixed-term deals can help homes save several hundred pounds a year if they switch from a default tariff, compared with a £17 saving from the lower price cap.
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said switching to a new energy deal could do “far more good than the cap ever will”.
The cap fell by less than some industry commentators had predicted because the tumbling cost of wholesale energy last year was offset by the rising cost of maintaining the energy networks and paying for government policies – all of which must be paid for through energy bills.
Robert Buckley, an energy expert at Cornwall Insight, said early predictions that the cap might fall by as much as £60 a year “focused largely on the wholesale element and did not factor in some of these extra policy and network costs”.
He said Ofgem had made some “technical adjustments” to its price cap calculations to update the typical consumption of UK homes and the costs of supplying energy, to reflect changes in the industry.
The Guardian reported late last year that millions of homes could look forward to lower energy bills in 2020 after the market price for gas fell by half to reach lows not seen in a decade.
In the UK the market price for gas hit 10-year lows of 24.75p a therm in September, compared with an average price of 55.63p the year before after a record number of gas cargoes from the US, Russia and Qatar poured into Europe.
S&P Global Platts has predicted the price of gas could fall by a further 30% to an average of 27p a therm in 2020 as more seaborne gas cargoes make their way to UK shores.
Buckley said if wholesale energy markets remained similar to what was seen in the winter, customers could expect “another slight reduction” to the cap later this year. However, households should still consider switching their tariff or supplier to find the best energy deal, according to consumer groups.
Ed Dodman of the Energy Ombudsman said the regulator’s falling energy price cap “shouldn’t discourage people from shopping around for better deals. We would encourage consumers to look at the customer service they can expect to receive as well as how much money they could save. Customer review sites and tools such as the Citizens Advice star ratings league table – which is based partly on Energy Ombudsman complaints data – will enable a consumer to make an informed decision.”
