Falling wholesale costs see Ofgem lower price cap

Ofgem has today (7 August) announced that the default price cap will be lowered by £75 to £1,179 due to a fall in wholesale costs.

Meanwhile, the cap for pre-payment meter (PPM) customers will decrease by £25 to £1,217.

The methodologies for the setting the two price caps previously differed but have now been brought into alignment. They have nevertheless remained at different levels.

The new caps will come into effect on 1 October and will stay in place for six months.

Dermot Nolan, chief executive of Ofgem, said: “The price caps require suppliers to pass on any savings to customers when their cost to supply electricity and gas falls.

“This means the energy bills of around 15 million customers on default deals or pre-payment meters will fall this winter to reflect the reduction in cost of the wholesale energy.

“These customers can be confident that whatever happens, the price they pay for their energy reflects the costs of supplying it.

“Households can cut their bills further in time for winter, and we would encourage all customers to shop around to get themselves the best deal possible for their energy.”

A combination of low demand during the winter, strong gas supplies and relatively healthy storage levels have pushed down wholesale prices, resulting in the cap reduction.

Ofgem said the wholesale element of the default cap fell by £75 to £446.  Costs such as VAT and supplier margins also fell slightly.

These reductions offset cost increases totalling £7 from other components such as operating costs, network charges and environmental schemes, resulting in an overall decrease of £75.

The default tariff cap was introduced on 1 January this year and was initially set at £1,137. But just weeks later Ofgem announced it would be raised by £117 on 1 April due to rising wholesale costs.

Since being implemented, the default price cap has been a controversial subject in the energy sector.

Just recently, British Gas owner Centrica blamed the cap for a decrease in adjusted earnings and adjusted operating cash flow.

Centrica saw a statutory operating loss for the six months to 30 June of £446 million compared to a £704 million profit last year.

Other big six providers have also cited the cap as having a negative impact on business, with SSE blaming the introduction of the cap as well as increased competition and higher operating costs for more than 400 planned job cuts.

Furthermore, the planned merger between SSE and Innogy’s retail arm Npower was called off last year due to “adverse developments” in the retail market and “regulatory interventions” such as the price cap, the companies claimed.