The energy regulator has lowered winter energy bills for 15m UK homes by reducing its energy price cap to record lows after wholesale energy market prices tumbled during the coronavirus pandemic.
Ofgem will lower the cap on default dual-fuel energy tariffs for 11m households by £84, from an average of £1,126 a year to a record low of £1,042 from this October. It will also lower the cap on energy bills for customers using pre-payment energy meters by an average of £94 a year, from £1,164 to £1,070 a year.
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The energy price cap will fall to its lowest level since it was introduced in January 2019 after the impact of the Covid-19 pandemic slashed demand for energy, causing gas and electricity market prices to fall to historic lows.
Ofgem adjusts the cap on energy bills every six months to ensure fair energy bills, which reflect energy company costs. These have fallen steeply because of the lower cost of buying gas and electricity from the wholesale markets in advance.
However, Ofgem’s cuts fall short of industry forecasts, which had suggested a cut of at least £85 and up to £100 a year for standard variable energy tariffs.
What is the energy price cap and how does it work?
How does the energy price cap work?
The cap, one of the biggest shake-ups of the energy market since privatisation, came into effect on 1 January 2019 for 11m households on default tariffs, known as standard variable tariffs (SVTs). The government told the energy regulator, Ofgem, to set the cap because ministers argued people on SVTs were being ripped off by big energy firms capitalising on consumer loyalty. The limit is not an absolute one but the maximum suppliers can charge per unit of energy and for a standing charge. There is a separate cap for 4m homes on prepayment meters.
Does that mean energy bills will never go up?
No. It is not a freeze, it is a movable cap. The energy cap has fallen twice since it was put in place because the wholesale price of electricity and gas, the biggest variable influencing prices, have fallen. But if energy market prices climb higher, the cap would move higher, too. Homes may also face higher bills if they use more energy because the cap applies to the price of each unit of energy – not the whole bill.
Is there any way to avoid the increase?
Yes. Homes can save hundreds of pounds a year by spending a few minutes on one of the many comparison sites, or sign up to an auto-switching service, and move to a cheaper tariff, either with your existing supplier or a rival one. Fixed tariffs, which are not covered by the cap, are almost always much cheaper than SVTs, although there are exceptions, so watch out. Several smaller suppliers also offer good customer service and variable tariffs that are well below the cap.
Could bills fall again?
Maybe. Energy market experts believe gas and electricity wholesale prices will remain low through 2020 because energy demand is lower than normal because of the Covid-19 crisis. But wholesale costs are not the only factor in setting the level of the cap. Ofgem, the regulator, includes the cost of using energy networks and paying for government policies, too. These costs are expected to keep rising.
Michael Lewis, the chief executive of E.ON UK, said he expected the price cap to fall by “at least £85 from this autumn” while analysts at Cornwall Energy, a consultancy, predicted a drop of potentially up to £100.
Jonathan Brearley, the chief executive of Ofgem, said: “Millions of households, many of whom face financial hardship due to the Covid-19 crisis, will see big savings on their energy bills this winter when the level of the cap is reduced.
“They can also reduce their energy bills further by shopping around for a better deal. Ofgem will continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy market.”
Ed Dodman, a director at the Energy Ombudsman, said the price cap cut is a “much-needed financial boost for millions of households, at a time when many people are struggling due to the economic impact of Covid-19 and lockdown”.
Dodman urged customers using a standard variable energy tariff to switch to a better deal to save money on their energy bills but also cautioned households to consider the customer service credentials of energy companies, too.
“Of course price matters, especially at the moment, but customer service is important, too,” he said.
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