Plummeting wholesale costs see price cap fall by £1,200  

Ofgem has confirmed the default tariff cap is to fall by £1,200 after wholesale energy costs more than halved in recent months.

The decrease will be £426 in real terms as the government has been protecting consumers with the Energy Price Guarantee (EPG), which effectively capped bills at £2,500.

From 1 July, the energy price cap will be set at an annual level of £2,074 for a typical dual fuel household paying by direct debit.

Prepayment meter (PPM) customers have seen their cap level also decrease, with their cap set at £2,077, a fall of £1,247. Those paying by standard credit meanwhile will see a £1,270 decrease to £2,211.

In a series of announcements on Thursday (25 May) the energy regulator explained that the wholesale cost allowance has fallen from £2,170 to £1,051 – a decrease of £1,119 or 52%.

The update means that prices for customers on default tariffs have fallen for the first time since the energy crisis took hold in late 2021. Although prices are lower than last quarter and significantly less than the £4,279 cap peak, bills are still well above where they were pre-crisis.

Elsewhere the energy regulator has announced that it will begin consulting on increasing the element of the price cap that covers profit margin, to enable suppliers to make “reasonable” returns.

It highlighted how it has recently clamped down on supplier finances to strengthen the market, and that it has introduced regulations on how much they can rely on customers’ credit balances and Renewable Obligation contributions as working capital, as well as the fact it has enhanced the “fit and proper” tests for energy company directors.

Under the plans to amend rates of return for suppliers, the Earnings Before Interest and Tax (EBIT) allowance would rise by approximately £10 for the next cap in October, taking it to c£47, equating to 2.4% of the full price cap level in that period.

By contrast, it added, supplier failures during the crisis cost each household an average of £83 and Ofgem said it “is determined not to see a repeat of this situation”.

Additionally the regulator has issued guidance to suppliers, setting out the conditions they need to meet if contemplating paying dividends to shareholders.

Ofgem chief executive Jonathan Brearley said: “After a difficult winter for consumers it is encouraging to see signs that the market is stabilising and prices are moving in the right direction. People should start seeing cheaper energy bills from the start of July, and that is a welcome step towards lower costs.

“However, we know people are still finding it hard, the cost-of-living crisis continues and these bills will still be troubling many people up and down the country. Where people are struggling, we urge them to contact their supplier who will be able to offer a range of support, such as payment plans or access to hardship funds.

“In the medium term, we’re unlikely to see prices return to the levels we saw before the energy crisis, and therefore we believe that it is imperative that government, Ofgem, consumer groups and the wider industry work together to support vulnerable groups. In particular, we will continue to work with government to look at all options.”

Industry reacts

Responding to the news Energy UK’s deputy chief executive, Dhara Vyas, said: “The fall in the price cap from July will be welcome news for customers who have had to face record energy bills over the last year amidst a steep rise in the cost of living and for whom the government’s bill support has been crucial in preventing even bigger difficulties. However, bills remain much higher than they were 18 months ago and many customers will continue to struggle, especially following the removal of some of that support.

“If – as the current projections indicate – annual bills of £2,000+ become the new normal, it underlines the importance and urgency of the energy industry, Ofgem, government and consumer groups working together to put in place targeted support for those most in need next winter.

“We also need to press ahead with expanding our own sources of domestic, clean power and making more of our homes energy efficient as these will help bring down energy costs permanently for all customers.”

Energy Security secretary Grant Shapps said: “It’s positive households across the country will see their energy bills fall by around £430 on average from July, marking a major milestone in our determined efforts to halve inflation.

“We’ve spent billions to protect families when prices rose over the winter covering nearly half a typical household’s energy bill – and we’re now seeing costs fall even further with wholesale energy prices down by over two thirds since their peak as we’ve neutralised Putin’s blackmail.

“I’m relentlessly focused on reducing our reliance on foreign fossil fuels and powering-up Britain from Britain to deliver cheaper, cleaner and more secure energy.”

National Energy Action’s chief executive Adam Scorer said: “Coming out of winter, most people will welcome any respite from record high prices, but it still leaves prices more than two-thirds higher than the start of the energy crisis and two million more households trapped in fuel poverty.

“More than 2.5 million low income and vulnerable households are no longer receiving any government support for unaffordable bills. For them, the energy crisis is far from over.”

Simon Virley, vice chair and head of energy and natural resources at KPMG UK, said: “Households will be hoping today’s news leads to more choice in the market, as the price cap has been the default tariff for over a year now, with very little incentive for consumers to switch suppliers to get a better deal.

“Beyond this latest announcement, energy suppliers still need greater clarity about the future direction of government policy for the energy market. Serious thought needs to be given to how best deliver sustainable competition in the long-term, whilst protecting those that need it from higher prices. If that is a move to a social tariff for energy, on what basis would the eligible group be defined, and is there an ongoing role for the price cap in this scenario?”