What to expect from Ofgem’s price cap update

Energy suppliers are anticipating Ofgem will cut the price cap when it is reviewed next week but what does the future hold for this contentious policy? Utility Week spoke to industry experts, including Eon's Michael Lewis about their views on the cap and where they see it moving next.

Ofgem is expected to announce a drop of at least £70 when it reveals the updated energy price cap level a week today (7 August).

The anticipated reduction would see customers on standard variable tariffs benefit from cheaper energy bills.

Industry analysts Cornwall Insight have projected household energy bills will fall by £83 when the cap is altered in October, while supplier Eon expects customers will see a reduction of at least £70.

The energy regulator updates the price cap level in April and October every year to reflect the latest estimated cost of supplying electricity and gas, including wholesale energy costs.

“As we see wholesale costs begin to fall, we will also expect to see the level of the cap to go down so these benefits are quickly passed on to consumers – we expect this to be the case for the next cap period should wholesale prices continue to fall,” said an Ofgem spokesperson.

“We implement a consistent model for each update to the level of the cap, to ensure that consumers get the best deal possible.”

As well as falling wholesale costs, the market has seen lower rates of inflation and lower smart meter costs, fuelling speculation that the next price cap level will be reduced.

Eon UK chief executive Michael Lewis told Utility Week: “While wholesale prices have spiked sharply in recent days and weeks, the overall trend of the markets has been generally downwards since Ofgem’s last price cap change back in early spring.

“A range of external factors, including plentiful energy supplies and mild weather conditions, have driven a falling market in recent months and because of this we expect to see lower prices when Ofgem updates the level of the cap next month. That means customers should see the benefit of lower bills in time for the colder months of the year.”

Lewis added: “Ofgem’s last change to the price cap was a significant increase, in excess of the original price cap reduction, caused by rising wholesale markets in the latter part of last year, so we hope customers will be heartened by an expected reduction in the coming weeks.

“Wholesale market costs represent less than half of the total energy bill and we must factor in other influences such as the cost of social and environmental programmes that larger energy suppliers gather on behalf of government, as well as distribution and other costs.”

SSE revealed it also anticipates a reduction but raised concerns over the accuracy of the price cap.

A spokesperson at SSE said: “We expect the price cap level to go down, reflecting falling wholesale prices. But energy prices include many other costs, such as delivering government’s environmental and social schemes and it is hard for the regulator to ensure the cap reflects all costs accurately.

“Fair and efficient markets are the best way to ensure lower prices and help pave the way to net zero. Retail market reforms should consider how to keep promoting competition rather than locking in long term regulatory price interventions.”

The introduction of the energy price cap has received some criticism from business leaders and has been linked to disappointing half-year financial results at EDF and Scottish Power.

British Gas owner Centrica has been granted a judicial review into how Ofgem calculates wholesale costs for its default price cap.

Iain Conn, Centrica’s group chief executive, said he is optimistic that the new government will embrace free competitive markets, underlining the importance of a competitive economy regardless of whether the UK remains in the European Union.

“This price cap that was introduced, which has clearly impacted Centrica materially, hasn’t actually solved the problem, it’s actually just postponed solving the problem,” he commented.

“I am hopeful that we can enter into a different dialogue with this new government about what the energy market of the future for the UK should look like and I look forward to engaging in those conversations with them going forward.”

Earlier this month, the Confederation of British Industry (CBI) called on the new prime minister to scrap the energy price cap as part of a series of measures to make the UK more “competitive, innovative and inclusive”.

In May, Ofgem launched a consultation on the future of the price cap, giving energy retailers and stakeholders an opportunity to voice concerns about the controversial policy.

The price cap originally came into force on 1 January 2019, with the regulator insisting the move would protect 11 million customers on poor value default tariffs.

When it was launched, suppliers had to cut the price of tariffs to the level of or below the cap. This also forced suppliers to scrap excess charges.

The cap was initially set at £1,137 at the start of the year, but the threshold increased by £117 to £1,254 in April.

Matthew Vickers, chief executive at the Energy Ombudsman, agreed the anticipated price cap drop is encouraging but urged customers to research the best energy deals.

“The prospect of a potential reduction in the price cap is good news for the 11 million UK households on poor-value default tariffs, but shouldn’t discourage people from shopping around for better deals,” he said.

“When switching to a new supplier, we think it’s important that consumers look at the customer service they can expect to receive as well as price.”

Vickers added: “A good price doesn’t necessarily mean good value. Researching customer service as well as price will enable a consumer to make an informed decision about switching.”

Mark Felix, commercial director – Home Services at MoneySuperMarket, raised concerns that the expected reduction would not alleviate the impact of the previous price hike – with even the new lower rate sitting outside the top 100 cheapest tariffs on the market.

“The price cap level will be reduced next week, but not significantly enough to wipe out the £117 rise that was a bolt from the blue for households in April,” he said.

“Wholesale prices have fallen over the last six months, but over the next month or so the market will prepare for winter and the cheapest deals in the market may start to creep up.

“However, the more competitive tariffs will still be better value for money and considerably cheaper than the price cap.”