Energy price cap to fall by £1,000

Ofgem has confirmed an almost £1,000 decrease in the price cap following what it describes as “the fundamental shift” in wholesale energy costs for the first time since the gas crisis began.

From 1 April the 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.

The prices paid by consumers vary depending on how they pay for their bills, with prepayment meter (PPM) and standard credit customers paying more than those on direct debit.

Those on standard credit (paying by cash or cheque) will see their cap fall by £1,051 to £3,482, while PPM customers will see their cap set at £3,325 (a £1,034 decrease).

However, the new level of the government’s Energy Price Guarantee means consumers will not pay more than £3,000 on average.

Outlining Ofgem’s decision to reduce the cap, the regulator’s deputy price cap director Dan Norton explained that very mild temperatures across the observation window resulted in wholesale costs falling by £967 to £2,170 (a 31% decrease).

Norton added that the high storage levels achieved in autumn have been largely maintained, and gas storage levels are currently at record highs for this time of year. This, he said, gave the market confidence that supplies will be sufficient for the rest of winter and reduced risks for the rest of the year including next winter, causing large falls in both near and longer-term prices.

“However, wholesale gas and power prices are still 2-3 times their historic average levels. The global market for gas supplies remains very competitive with Russian pipeline supplies to Europe continuing to be very low, and many risk factors remain,” he added.

Other cost decreases which were included in the wholesale costs were seen for Contracts for Difference. These have decreased from -£40 to -£54 compared to the current cap period, which takes into account generator payments and higher power prices.

Meanwhile network costs rose by £16 to £388, up by 4%. While costs relating to supplier failures through the Supplier of Last Resort (SoLR) process reduced from £61 to £19, this was offset by cost increases elsewhere, as non-SoLR costs have increased by £58.

Norton explained this was primarily driven by two factors. These include a £24 increase in the costs associated with maintaining and upgrading the gas and electricity networks, which are linked to inflation, and in the costs of balancing the electricity system of £34 because of changes in the way these charges are recovered and the scale of interventions made by the Electricity System Operator this winter.

Policy costs saw a 9% increase to £165, with inflation responsible for increases in the Warm Home Discount, Renewables Obligation and Assistance for Areas with High Electricity Distriubtion Costs.

Energy Company Obligation costs increased from £36 to £44. This was due to a combination of inflation and the introduction of the ECO+ scheme.

Additionally, Ofgem admitted that it overestimated costs of the Green Gas Levy for the previous period and that, coupled with a more conservative estimate for the current period, meant there was a reduction to the levy costs.

Ofgem chief 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, Brearley warned, prices are unlikely to fall back to the level seen before the crisis began.

“Where people are struggling, we urge them to contact their supplier to make sure they are getting all the help and support they are entitled to. We also think that, with bills continuing to be so high, there is a case for examining with urgency the feasibility of a social tariff for customers in the most vulnerable situations,” he added.

The next quarterly price cap update will be on 26 May 2023.

Responding to the news, a Department for Energy Security and Net Zero spokesperson said: “Government support will continue to help households with their energy bills.

“We know this is a difficult time for families, which is why the government has covered around half of the typical household’s energy bill this winter, and by the end of June the Energy Price Guarantee will have saved a typical household in Great Britain around £1,000 since it began in October.”

“The cost of energy has already been falling and we expect this to drop further over the coming months, which we fully expect suppliers to pass onto their customers,” they added.