Ofgem makes ‘full use of powers’ to propose tough price cap

Ofgem has today (6 September) outlined its plans for the energy price cap, due to be put in place by the end of December.

The industry regulator proposes the cap to be set at £1,136 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 says 11 million households on poor value default tariffs are set to save around £75 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.

Dermot Nolan, chief executive of Ofgem, said: “Ofgem has made full use of the powers parliament has given us to propose a tough price cap which will give a fairer deal to consumers on poor value default tariffs.

“Once the price cap is in place, all households in Great Britain covered by the cap will be protected from being overcharged for their energy. Consumers can have confidence that falls in energy costs will be passed on to them and if costs increase, Ofgem will ensure that any rise will be due to genuine increases in energy costs rather than supplier profiteering.

“Households protected by the cap will be able to save even more money by shopping around for a better deal. Meanwhile Ofgem will continue with reforms which aim to deliver a more competitive retail energy market which, combined with protection for those who need it, works for all consumers.”

The level of the cap will be updated by Ofgem every April and October, to reflect the estimated costs of supplying energy.

Responding to today’s announcement, chief executive of Energy UK Lawrence Slade, said: “There are over 70 suppliers in the energy market who will now be assessing how this impacts their individual business, however for many suppliers this will pose a significant challenge.

“It is crucial that the cap ensures we have an investible energy sector where efficient and financially robust companies can trade, and innovation and engagement can continue to flourish and deliver benefits for consumers.”

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”.

Gillian Guy, chief executive at Citizens Advice, said the cap is an “important step in the right direction”.

She added: “While the price cap should save people on standard variable tariffs money, people should still be able to find a better deal on their energy bills by shopping around. A cap on default tariffs is a good start in tackling the cost of being a loyal consumer.”

However Jane Lucy, of the energy auto-switching service Labrador, said “ring-fencing price caps within this stagnant sector serves no real purpose”.

She added: “To ensure that consumers save money, the only true tool that can really deliver on this is auto switching. The government needs to make sure that customers have all the information and capabilities to switch to a cheaper tariff without needing to rely on the consumer’s actions to secure this.

“The recent British Gas fine for charging an exit fee to customers switching tariff or leaving is a testament to the nature of the industry. This needs to change imminently as cheap energy should univocally be a basic right in this country.”

Ofgem said it is aiming to confirm the cap level in November in time for the price cap to come in at the end of the year, subject to the statutory consultation process.

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.