Energy price cap predicted to fall in October

The level of the energy price cap looks set to decrease in October, according to research from consultancy firm Cornwall Insight.

Wholesale costs were largely blamed for the rise of £117 for the default cap today (7 February) but, the consultancy firm claims, with wholesale costs beginning to decrease it predicts the price cap is likely to fall by around £50 in the next readjustment.

This is assuming wholesale costs remain at the same level the market experienced at the end of January.

Robert Buckley, head of retail and relationship development at Cornwall Insight, said: “Today’s announcement comes as little surprise because built into the price cap design was the possibility of upwards movement in response to changing market conditions.

“Despite the upward movement in the cap, wholesale prices have been falling recently and this could impact the next change to the cap.

“Should such a trend continue, forecasts from Cornwall Insight show that almost half of the increase arising from today’s announcement could be erased in the October readjustment.”

The new level announced today will come into effect on 1 April and will be reviewed again later in the year.

The regulator blamed a rise in wholesale costs for the cap increase, with Ofgem estimating that around £74 of the £117 increase in the default tariff cap is due to higher wholesale energy costs, which makes up more than a third (£521) of the overall cap.

Buckley added: “Currently, most of the competitive tariffs are priced around £200 to £250 below the new level of the cap.

“This has seen the gap between the lowest tariffs in the market and price cap almost doubled since the cap’s launch in January.

“This gap has been partly driven by falling wholesale costs with some suppliers reacting quickly and lowering their prices.

“Today, we suspect suppliers will be considering their commercial strategies and assessing if, when and by how much they start to respond through tariff reductions if falling wholesale cost trends continue, or whether they need to price towards the raised cap.

“Clearly, this will also be a competitive consideration, given there are suppliers that are already priced well below the cap and switching is at record levels.

“The decision is not straightforward. Fragile balance sheets, varying hedging strategies, and rising policy and network costs mean there is no one-size fits all answer.

“What is clear is that for all suppliers, the evidence of recent losses and failures shows the stakes are high for all.”