Ofgem’s energy price cap cut: how the changes affect you
About 27 million households face slightly lower energy bills this summer after Great Britain’s energy regulator, Ofgem, cut the price cap on gas and electricity to £2,074 from July.
The cap has fallen sharply from £3,280 over the last three months, down from highs of over £4,000 in the three months before that. But most households will feel little relief after the government cancelled a number of schemes to make bills more affordable.
Experts have warned that energy costs could stay at unprecedented levels, with millions of households remaining in fuel poverty, until the end of the decade.
If the price cap is falling, why won’t I feel better off?
Usually Ofgem’s cap determines the bills for around 27 million households on standard energy tariffs by limiting the rate that suppliers can charge for each unit of gas and electricity. It reached £4,279 in the first months of the year, before reducing to £3,280 from April.
But households won’t feel the full effect of falling energy prices because the government helped reduce bills over the winter with its energy price guarantee.
The scheme limited the average household bill to £2,500 – well below the Ofgem cap. The government also gave every household £400, split into monthly payments between October and April, to reduce costs further. Both those schemes have now come to an end. The wholesale price has also fallen, allowing Ofgem to lower the cap. This means average annual bills will stay the same for most households from July.
Will energy bills fall further this year?
Probably not. Energy experts have predicted that Ofgem’s energy price cap, which is adjusted quarterly, is likely to remain at similar levels for the rest of the year. They also think bills could remain at unusually high levels for the rest of the decade.
Analysts at Cornwall Insight, an energy consultancy, say the price cap could slip to about £1,975 at the next adjustment in October before rising again to £2,045 from January next year. The predictions are subject to changes in the global energy markets – which remain stubbornly higher due to Russia’s war in Ukraine – but Cornwall says it does not expect bills to return to pre-pandemic levels anytime soon.
The good news is that energy suppliers may soon begin offering deals which are priced below the energy price cap in an attempt to win over new customers as the switching market finally returns in earnest. Cornwall expects a tentative return of competitive fixed-rate deals from the third quarter of this year.
It’s also important to note that Ofgem’s cap will limit the amount you can be charged for each unit of gas or electricity which is used. But it does not cap the total bill. So if you use more than the average household, you will pay more than the cap.
What help is the government offering?
The government has replaced its broad-brush energy price guarantee, and its one-off £400 for all households, with a series of payments targeted at the most vulnerable. This includes a £900 payment for those on means-tested benefits, £300 for pensioners and an extra £150 for disabled people.
The bad news? About 1.7 million households in severe fuel poverty – mostly based in London, the north-east and the north-west – will miss out on the extra help because they are not registered to receive certain benefits, according to researchers at the University of York. These households are estimated to include 688,000 fuel-poor families with children.
There are also about 480,000 households which use communal heating systems – including the residents of council-owned tower blocks – which are not protected by the Ofgem cap. They face a 350% rise in heating bills. The operators of these heat networks, such as local councils, can apply for government help with costs, and are supposed to pass that to consumers, but the system has been criticised because bills do not always break down the taxpayer-funded discount.
Ofgem’s energy price cap does not protect businesses, charities or public sector organisations such as schools, hospitals and care homes.
Instead, the government has put forward a scheme which offers eligible firms a discount on the wholesale price of energy. There are greater discounts offered to energy and intensive businesses such as manufacturers.
The support scheme took effect from 1 April and is expected to offer a total of up to £5.5bn of support over a year. This is far less than the government offered through its original aid package which made about £18bn worth of savings available to businesses over six months last year.
What more can be done to help struggling households?
The energy price cap protects households from unfair energy bills by reflecting the cost of supplying energy. But that doesn’t mean it leads to affordable bills. The energy crisis has reignited calls for a social energy tariff for the economically vulnerable, which would be set well below normal costs. These already exist in the water sector.
Meanwhile, Ofgem has called for utility companies, consumer groups, trade representatives and government agencies to work together to create a universal register of vulnerable people to help avoid households falling through the cracks. It would follow a “tell us once” principle where families who have vulnerabilities tell one organisation about their circumstances and, with permission, this could be shared with other agencies and suppliers. However, it is unlikely to become a reality before next winter.
Ultimately, the UK can protect itself from the impact of future gas market price surges by reducing its reliance on fossil fuels. Green groups including Friends of the Earth and Greenpeace have called on the government to learn from the winter energy crisis by investing in renewable energy, home energy-efficiency upgrades and the rollout of electric heat pumps.