Energy bills to rise for millions as Ofgem raises price cap

It will affect 11m households on default or standard variable tariffs and four million prepayment meter customers

  • Those on default tariffs will see their bills increase by £117 a year
  • An average of £106 a year will be added to prepayment customers' bills
  • Ofgem blames wholesale costs, which have increased by 17%, for the rise in the price cap levels

The Big Zero report

Million of consumers will see a rise in energy bills after Ofgem said it would increase the level of two price caps.

Energy bills will rise by £117 for 11 million households on default or standard variable tariffs and by £106 for four million prepayment customers.

That takes the total to £1,254 a year for dual fuel standard variable customers with typical usage and £1,242 annually for prepayment meter customers.

Energy price caps limit the price a supplier can charge per kWh of electricity and gas.

Ofgem blames wholesale costs, which have increased by 17%, for the rise in the price cap levels, which will come into effect from 1st April 2019.

It will scrap the £76 per year savings for default tariff customers that came into force at the start of the New Year.

However, the regulator’s analysis suggests these customers could be paying around £75 to £100 a year more on average for their energy had the default tariff cap not been introduced even after today’s increase.

Dermot Nolan, Chief Executive of Ofgem said: “Under the caps, households on default tariffs are protected and will always pay a fair price for their energy, even though the levels will increase from 1st April.

“We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering.”

The government reiterated Ofgem’s findings that suggest standard variable customers will still be £75 to £100 better off.

Energy and Clean Growth Minister Claire Perry added: “The cap is designed to ensure energy companies offer good value to their customers and continue to thrive as an efficient business. We were clear when we introduced the cap that prices can go up but also down.

“With over 60 companies and more than 200 tariffs to choose from, consumers can always shop around for a cheaper deal and make big savings by switching.”

Additional Information

The price caps are a cap on a unit of gas and electricity, with standing charges taken into account. They are not a cap on customers’ overall energy bills, which will still rise or fall in line with their energy consumption.

Suppliers who raise their prices from 1 April have to write to affected customers 30 days before the price rises take effect to inform them.

Ofgem’s analysis suggests the default tariff price cap would have reduced the price of the average standard variable tariffs from the six largest suppliers by around £75 to £100 per year since April 2015 had it been in place over this period.

The chart below shows these suppliers have consistently charged more than the indicative level of the default tariff cap, which reflects the estimated costs of an efficient supplier. This analysis suggests had the cap not been introduced on 1st January, customers would be paying significantly more even after the increase for the next cap period. However, it is impossible to estimate an exact savings figure going forward as suppliers can no longer price above the level of the cap.

Image: Ofgem

Suppliers buy electricity and gas on the wholesale markets in advance, purchasing “forward contracts” gradually over time. The default tariff price reflects suppliers’ costs because we use the wholesale prices of the relevant forward contracts that were sold in advance during an “observation window” before each six-month price cap period. The observation window for the summer price cap period (April-September) is the previous August-January.

From 1st April, the per unit level of the default price cap (figures for prepayment meter price cap in brackets) for a typical customer paying by direct debit will be 19p (16p) per kWh for electricity-only customers and 4p (4p) per kWh for gas-only customers.

The level of the two caps differs because the prepayment meter price cap is calculated using a methodology chosen by the Competition and Markets Authority while Ofgem has designed the methodology for the default tariff price cap, which it considers is most appropriate for a market-wide cap.

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