Record gas prices drive up price cap to highest level

Ofgem has confirmed the default tariff and pre-payment meter (PPM) caps will rise later this year due to record gas prices.

From 1 October, customers on default tariffs paying by direct debit will see an increase of £139 – from £1,138 to £1277. PPM customers will see an increase of £153 – from £1,156 to £1309.

Last week the regulator’s chief executive Jonathan Brearley issued a warning to customers about the rise, slightly less than anticipated, which takes the cap to its highest level yet.

This increase is driven by a rise of over 50 per cent in energy costs over the last six months with gas prices hitting a record high as the world emerges from lockdown.

Wholesale costs represent the biggest and most unpredictable factor when setting the cap and they account for roughly 40 per cent of the overall level.

Gas prices have risen to a record high in Europe due to a recovery in global demand and tighter supplies. This is increasing the cost of heating homes and pushing up electricity prices.

Last winter, the level of the cap fell by £84 after passing onto customers the savings from lower wholesale energy costs as countries went into lockdown and demand fell.

Despite the increase, Ofgem insisted customers were still saving an estimated £75-£100 or £1 billion every year as a result.

It reiterated the extra support available to customers, including a recent commitment by suppliers to help those in need during the winter.

Brearley admitted the timing and size of the increase will be “particularly difficult” for many families still struggling with the impact of Covid.

He added: “We have put tough rules in place to ensure suppliers treat customers who are struggling with bills fairly, and welcome their commitment to reach out to those who most need help this winter. Where help is not forthcoming, we will not hesitate to act.

“I appreciate this is extremely difficult news for many people, my commitment to customers is that Ofgem will continue to do everything we can to ensure they are protected this winter, especially those in vulnerable circumstances.”

Ofgem confirmed the cap level from 1 October will include a £9 adjustment to allow suppliers to continue recovering some of their additional costs related to the pandemic such as higher levels of bad debt.

However yesterday (5 August) the regulator published its decision not to include any further adjustment for additional costs related to the pandemic in the October – March period (cap period seven).

Reaction

Responding to the announcement, Energy UK’s chief executive Emma Pinchbeck, said: “Ofgem sets the price cap at a fair level for customers but it also needs to reflect when suppliers face increased costs to allow them to keep operating in a market where most providers are making little or no profit at present.

“Continuing the transition to our own clean sources of power and further reducing our dependency on fossil fuels for our heat and power, will not only help us meets our climate change targets but remove the risk of customers being exposed to volatile price rises like this one. It also underlines why making our homes energy efficient, which can permanently cut bills by hundreds of pounds a year, should be a top priority.”

Elsewhere Greg Jackson, founder and chief executive of Octopus Energy, called for the cap to be made permanent.

He said: “The price cap is the single most effective intervention for energy customers. It’s like the minimum wage – it guarantees a level of decency for everyone, but of course they can still do better if they shop around.

“Global gas prices have tripled in the last year, so without the price cap, energy prices would be hundreds of pounds higher than they are now. Never has the cap been more vital and it should be made permanent.”

James Plunkett, executive director at Citizens Advice, said the rise coupled with a cut to Universal Credit could lead to a “perfect storm”.

He said: “This price hike could lead to a perfect storm for families this autumn, hitting people at the same time as a Universal Credit cut and the end of furlough. It’s particularly worrying given families on Universal Credit are far more likely to already be in energy debt.

“With bills rising and incomes falling, many families will find it hard to escape. For many, debt will be the inevitable consequence.

“It all adds to the growing case to rethink the government’s planned cut to Universal Credit and keep this lifeline which has been vital to keeping so many afloat.”