Wholesale costs see price cap rise by £100

A big increase in wholesale costs has resulted in the next default price cap being raised by almost £100, Ofgem has confirmed.

Announcing the move this morning (5 February) the regulator said the cap was to rise by £96 to pre-pandemic levels of £1,138.

For six months from 1 April the cap will increase for 11 million default tariff customers, and by £87 to £1,156 for 4 million pre-payment meter (PPM) customers.

Following the first lockdown last March, wholesale prices fell sharply in line with decreased demand and as a result, the cap fell by £84 in October last year to its lowest level yet for the current winter period.

Ofgem said demand for energy has since recovered which has pushed wholesale prices back up to more normal levels.

Additionally the default cap allows suppliers to claim £23 to cover higher levels of bad debt from more customers being unable to pay their energy bills due to the impact of Covid.

Jonathan Brearley, chief executive of Ofgem, said bill increases are “never welcome”, especially when many consumers are struggling due to the pandemic.

Brearley added that the regulator had “carefully scrutinised” the changes to ensure customers pay a fair price.

He said: “The price cap offers a safety net against poor pricing practices, saving customers up to £100 a year, but if they want to avoid the increase in April they should shop around for a cheaper deal.

“As the UK still faces challenges around Covid-19, during this exceptional time I expect suppliers to set their prices competitively, treat all customers fairly and ensure that any household in financial distress is given access to the support they need.

“The government and Ofgem have been working with the energy industry and consumer groups to support customers through this difficult time and I urge anyone worried about paying their energy bills to contact their supplier and access the help available.”

Responding to this morning’s announcement Energy UK’s chief executive Emma Pinchbeck said: “Today’s rise reflects that the cost of buying energy – by far the biggest part of the bill – has risen significantly over the last few months. It also includes a greater allowance for debt given the difficulties many customers are facing in paying bills at present.

“Suppliers have been doing everything they can to support households through this difficult period – increasing the amount of payment holidays, agreeing repayment plans as well as providing emergency credit to prepayment customers. Any customers experiencing financial difficulties should contact their energy supplier.”

Alistair Cromwell, acting chief executive of Citizens Advice, described the increase as a “heavy blow”.

He said: “This increase will be a heavy blow to a lot of households. For many people on Universal Credit it will come at the same time as the £20 a week increase to the benefit is set to end.

“With a tough jobs market and essential bills rising, now is not the time for the government to cut this vital lifeline.”

Further rises ahead

Robert Buckley, head of relationship development at Cornwall Insight, believes the cap could rise further still later this year.

Buckley said today’s “substantial increase” negates all of the reduction in October’s price cap update. He did however say the rise was “little surprise”, pointing to the fact that April electricity baseload prices have risen 16 per cent from 1 December to present, reflecting continued cold weather and higher demand levels.

He added: “Although wholesale prices represent a large part of today’s increase, there are other factors at play. Ofgem’s £23.69 adjustment for bad debt and rises to some policy costs to support renewable generation will have no doubt compounded this rise.

“If wholesale price levels are maintained through the summer, early predictions from Cornwall Insight show that the Winter 2021-22 cap could see a further increase of approximately £14, assuming that the £23.69 Summer 2021 adjustment allowance is not carried on into next winter.”