OFGEM Lowers Energy Price Cap – What Does This Mean For You?

From October of this year OFGEM, the gas and electricity regulator, has announced that the energy price cap will be lowered. This will affect approximately 15 million customers across the UK who are currently using pre-payment meters, are on standard variable or default deals.

The energy price cap was an initiative brought into practice by Theresa May in January 2019. It was designed as a mechanism which OFGEM can use to force energy suppliers to pass on savings to their most vulnerable customers when supply costs drop. Since its inception the caps have been changed twice; they went up in April and are now going down again in October. However, the initial January cap was set at a lower level than will be implemented in October, meaning that those affected will still be worse off than they were at the beginning of the year.

The saving between the period from April onwards, when compared with the new cap in October will be £75 for those currently using standard variable or default deals and £25 for customers using pre-payment meters. The reason for the difference in savings is down to increased costs for supplying pre-payment meter customers with the infrastructure to use pre-payment keys and cards to top up meters.

The energy cap is largely based around wholesale energy costs which have fallen significantly since February. This is down to relatively low demand over the last winter period and a strong gas supply leading to better than expected storage levels in the UK. This has, in turn, helped offset other rises for the energy sector such as; network charges, environmental schemes and various investments in infrastructure.

An OFGEM spokesperson, Chief Executive Dermot Nolan, has said with regards to the implementation of the caps that “The price caps require suppliers to pass on any savings to customers when their cost to supply electricity and gas falls”, but also that “households can cut their bills further in time for winter, and we would encourage all customers to shop around to get themselves the best deal possible for their energy”. So although the lowering of the price cap may be a positive factor for millions of customers, greater savings can be had by shopping around and switching energy providers.    

The impact that this change will have for customers will likely be a mixed bag. It is important to note that the cap is placed on each unit of energy used (i.e KWh) and not on the total bill. So if you use more energy, you will be presented with a higher bill than another customer that has used less. The change also comes into effect as the cooler temperatures will be starting to really bite. This means that the heating will be on more regularly, so the cap may feel ineffective as in real terms winter bills are usually going to be higher.

What is more clear to see from the tone of feedback coming from the industry side of the argument, is how the energy companies expect the price cap changes to affect them. The price cap calculations only allow for a £21 profit, per customer, per year and this has put a squeeze on profits, particularly within the established ‘big 6’. Both SSE and Centrica, the owners of British Gas, have released statements condemning the move by the sectors regulator. They have both warned of negative consequences that accompany lower profits which include projected job losses from both companies. However, not all in the sector share the same view with many of the smaller energy providers coming out in support of the price caps and heralding the protection it offers customers. 

One possibly unintended negative impact of these measures is that for the first time, pre-payment customers will be paying more than standard users. This has worried consumer groups such as Which?, who have voiced concern that it is usually the most vulnerable in society that use the pre-payment meters. It is feared that when the changes come into effect, the difference will be too small to prevent more people being dragged into ‘fuel-poverty’. This is increasingly likely as the lower prices will be offset by higher usage of lights and heating during the colder, darker winter months. As with the energy regulator, Which? has recommended that consumers take advantage of a competitive market and shop around before winter arrives. It is highly likely that there is a deal available for every household that will render the price cap obsolete. This is because changing supplier, especially away from the ‘big 6’, can produce significant savings on those offered when offers such as time limited ‘fixed deals’ expire. Read our reviews of energy companies outside the ‘big 6’ to find out if you could switch and save!

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