Ofgem expected to raise price cap on default tariffs by £100

Ofgem is expected to announce a significant increase to its price cap on default tariffs on Thursday (7 February).

A number of industry analysts predict the price cap, which came into effect on 1 January 2019, will rise by around £100 from the current level of £1,137.

Head of regulation at Uswitch, Richard Neudegg, said: “The price cap model swiftly passes through changes in market costs, reducing the possibility of suppliers absorbing at least some of them to avoid or delay customer price rises.

“The realities of the energy market are now catching up with the politics of the cap, with Ofgem expected to confirm it is wiping out any initial savings through an estimated £80-£100 hike to the cap level – just six weeks after the cap was introduced.”

The new cap will come into force in April and will be reviewed again in October this year.

Speaking at Ofgem’s Future of Energy Conference in January, chief executive Dermot Nolan cited rising wholesale costs as the reason behind a potential rise.

He said: “While I cannot say today exactly what it will be, wholesale costs have risen significantly over the last year.

“As a result, it is likely that we will announce an increase – and potentially a significant one – in the level of the cap.”

In response to the news of a potential rise shadow energy minister Alan Whitehead expressed his concern.

He said: “If true then Ofgem is rapidly rising prices only a month after the cap first came in, which after the government’s two years of dither and delay in implementing this cap means further costs for energy customers.

“Wholesale price rises peaked before Christmas so we would question the logic of a significant price rise so soon after the initial cap was set.

“The question for ministers are why are Ofgem doing this when they’re supposed to review every six months, are they under pressure from the judicial review?”

British Gas owner Centrica revealed in December that it is seeking a judicial review against  the regulator over how it calculated wholesale costs when it set the level of the incoming energy price cap.

The news of the anticipated rise has also prompted concern by some in the industry.

Sally Jaques, head of energy at the auto-switching service Weflip, said: “It will be ironic if, three months after being introduced, the government’s own price cap unintentionally delivers one of the single biggest energy price increases the market has seen for years.

“This is the first test for the new price cap and more importantly for providers.

“Before the cap was introduced, the big six competed on price, with their standard variable tariffs varying by around £50 to £100 a year.

“We are now likely to see them all rise, as one, to the level of the cap.”

Yet Gillian Guy, chief executive of Citizens Advice, believes suppliers would still increase their prices without the cap and would do so from a higher starting point.

She said: “While any increase in energy bills will be unwelcome news for households, the cap is expected to increase because the cost of doing business is going up for energy suppliers.

“If the cap was not in place, suppliers would still likely be increasing their prices, but would be doing so from a higher starting point.

“The cap means that people are paying a fairer price now, and will continue to pay a fairer price even if the level of the cap rises.

“Consumers will still be better off if they shop around for a better tariff, or take simple steps to make their home more energy efficient, like insulation or heating controls.”

Similarly the Department of Business, Energy and Industrial Strategy (BEIS) believes the cap will help protect customers.

A spokesperson said: “Customers will always be better off under the cap, protecting 11 million households from poor value standard variable and default tariffs.

“Ofgem designed the energy price cap independently and in consultation with industry to ensure prices are fair for consumers and suppliers, accounting for changes to underlying costs.”