Price cap falls below £2,000

The energy price cap will dip below £2,000 for the first time since April 2022 when it is updated in October, Ofgem has announced.

It comes as the energy regulator confirmed a series of decisions around increasing the Earnings Before Interest and Tax (EBIT) allowance, supporting prepayment meter (PPM) customers and plans for a new consumer code of conduct which is expected to be in place by winter.

In a move widely anticipated following months of plummeting wholesale prices, the energy regulator has confirmed that in Q4 2023 the cap will be set at an annual level of £1,923 for a dual fuel household paying by direct debit based on the current typical domestic consumption values rate.

This will save these households an average of £151 on the previous quarter and represents the lowest level since October 2021.

Ofgem’s announcement confirms the continuation of a downward trend since prices peaked at £4,279, but it remains well above the average pre-energy crisis and the market “remains volatile”.

Meanwhile PPM customers will see their cap fall by almost £130 to £1,949 while those on standard credit will see a £159 drop to £2,052.

Elsewhere, the regulator has announced several other changes to the cap.

These include a final decision to raise the EBIT allowance from its current rate of 1.9% to 2.4% which will cost £10 per customer per year. Most of this (£8), Ofgem explained, is to cover Renewables Obligation (RO) ringfencing.

It will also remove the temporary RO ringfencing allowance which is covered by the additional EBIT costs.

It is further introducing a new sliding scale for EBIT meaning if prices surge, the EBIT allowance reduces as a percentage preventing suppliers from making excessive profits.

Explaining its rationale behind the decisions, Ofgem said raising the EBIT allowance aims to make the sector more resilient as it moves into “another difficult winter when price volatility remains a risk”.

“The EBIT rate, which is well within international norms for energy retail profits and lower than most other business sectors in Britain, will also be altered from a ‘flat rate’ to a more flexible model that tracks the price cap level and tapers as low as 1.75% in the event of another price surge in the wholesale market. This would prevent suppliers from making excessive cash profits in a high-cost market,” it further explained.

There have been further announcements around support for PPM customers.

These include a final decision on the allowance for additional support credit (ASC) bad debt costs, implementation of UNC840 in the cap which reduces the PPM premium and a new consultation on price levelisation.

The cap for PPM customers will be reduced by £51 per year thanks to an updated approach to calculating the costs of unidentified gas which was approved in April this year.

This change, Ofgem added, will help it introduce an initial 12-month allowance to cover increased debt costs associated with ASC offered to PPM customers.

Meanwhile its consultation on standing charge payment levelisation is seeking to “permanently end the PPM premium”. Government is currently supporting PPM customers via its Energy Price Guarantee but this will end in April next year and Ofgem has been tasked with resolving the issue.

Commenting on the announcements Ofgem boss Jonathan Brearley said there are “no excuses” and warned suppliers they must do all they can to support their customers this winter.

He said: “It is welcome news that the price cap continues to fall, however, we know people are struggling with the wider cost of living challenges and I can’t offer any certainty that things will ease this winter.

“That’s why we’ve introduced new measures to support consumers including reducing costs for those on pre-payment meters, and introducing a PPM code of conduct that all suppliers need to meet before they restart installation of any mandatory PPMs.

“There are signs that the financial outlook for suppliers is stabilising and reasonable profits are returning. With the small additional allowance we’ve made to Earnings Before Interest and Tax (EBIT), this means there should be no excuses for suppliers not to be doing all they can to support their customers this winter, and to reinforce this we’ll be introducing a consumer code of conduct which we will look to have in place by winter.

“This code will ensure there are clear expectations of supplier behaviours especially for their most vulnerable consumers with whom suppliers should be reaching out proactively, with compassion and understanding. There are great examples of suppliers already doing this but I want to see this become the norm in such an essential sector that has such a big impact on people’s lives.”

The next price cap update will be in November, covering January – March 2024.