Ofgem confirms level of price cap

Ofgem has today (6 November) set the final level of the incoming energy price cap at £1,137, which is just £1 higher than the proposed amount.

The regulator said the cap will come into effect on 1 January.

The cap was subject to the statutory consultation process after the £1,136 price was first revealed on 6 September.

Following today’s announcement, Ofgem’s chief executive, Dermot Nolan said: “From 1 January, the energy price cap will put an end to customers on default tariffs being overcharged as much as £1 billion for their gas and electricity.

“The price cap will ensure that whether energy costs rise or fall suppliers are not feathering their nest and changes in energy prices will reflect the underlying costs to heat and light our homes.

“Consumers who want to cut their bills further should shop around for a better energy deal and while the cap is in place, we will continue our work to make this as easy as possible.”

The cap will be set at £1,137 per year for a typical dual fuel customer paying by direct debit. When it is introduced suppliers will have to cut their prices to at or below the level of the cap.

Ofgem said “wholesale costs have risen significantly over the last year” and warned that if this trend continues, it is likely that in February the regulator will announce an increase in the level of the cap to take effect in April.

According to Ofgem, 11 million households on poor value default tariffs are set to save around £76 on average, while a typical consumer on the most expensive tariffs would save more than £120.

The exact savings each individual household would make will depend on the price of their current deal, how much energy they use, whether they have both gas and electricity and how they pay for their energy.

Responding to today’s announcement, Lawrence Slade, chief executive of Energy UK, said: “The price cap will present a significant challenge for many of the 70+ suppliers in the retail market, who are already facing steeply rising costs – the vast majority of which are out of their direct control, at a time when the market is more competitive than ever.

“It is crucial that the cap doesn’t halt this growth of competition and choice and still enables energy companies to both invest and attract investment.”

On July 19 the Domestic Gas and Electricity (Tariff Cap) Act became law giving Ofgem the powers to put the price cap in place.

It is designed to be a temporary measure until 2023 at the latest. Ofgem says this will allow it to put further reforms in place to make the energy market “more competitive and work better for all consumers”.

The first update of the level of the price cap will be announced in February 2019 and come into effect in April 2019. It will then be updated every six months.

Critics of the price cap have previously warned the poorest customers could end up paying more for their energy bills.

Speaking at a fringe event at the Labour party conference in September, shadow energy minister Alan Whitehead said higher bills for the most hard-up customers could be a “perverse outcome”.

Whitehead said: “The concern now is that with the wider price cap coming in, the original assistance to vulnerable customers will be subsumed into the wider price cap with the effect that vulnerable customers may be paying more under that original price cap.”

Some organisations meanwhile have raised concerns that the cap will reduce competition.

Sam Dumitriu, the Adam Smith institute’s head of research, said:“Economic theory and international evidence predicts that imposing a price cap on the retail energy market will lead to less customer engagement, the withdrawal of the biggest discounts and higher average prices.

“Reduced rates of customer engagement will lessen the uptake of cost-saving innovations, such as smart metering and decentralised energy distribution, harming consumers and increasing carbon emissions.

“Relative price caps will also likely lead to reduced customer engagement, lesser competition in the fixed rate market and higher mark-ups on SVTs. Access to information will likely increase customer engagement and the CMA’s [Competition and Markets Authority] recommendation of the creation of disengaged customer database should be implemented alongside further trials of other information interventions.”