What does the PRICE CAP cdscsdc BOMBSHELL mean for you?
It’s already an eye-watering £1,971, and on Monday Ofgem sparked dismay by revealing it will now review the energy price cap FOUR times a year. Here our experts analyse...
ANY hope that cheap fixed energy deals might soon return was dashed yesterday by a bleak announcement from watchdog Ofgem. This time last year, in an ultra-competitive market, suppliers were racing to offer rock-bottom tariffs in order to entice new customers.
But if households were holding out for a swift reappearance of those cheap deals, they have been given a reality check.
The regulator confirmed that its priority was no longer to offer ‘the lowest possible price to customers’. Instead, its focus is now on enabling ‘efficient suppliers to finance their business’, it wrote in a document explaining the changes that was published yesterday.
As part of this strategy, Ofgem says it will review the price cap, designed to protect households from unfair pricing, every three months, rather than every six months, as it does currently.
And buried in its proposals is a plan to effectively penalise suppliers that offer cheaper deals through a ‘Market Stabilisation Charge’.
Consumer champion Martin Lewis was so incensed by the plans, he described them as ‘a ‘f ****** disgrace that sells consumers down the river’.
And there is no doubt they make sober reading for households.
The Bank of England already predicts energy bills could rise to an average of £2,800 a year in October. That is the equivalent of about a third of the annual state pension, and 75 pc of a single person’s Universal Credit entitlement.
What’s more, under Ofgem’s proposal, households could face yet another bill hike in January — right in the middle of winter.
The watchdog insists reviewing the price cap every three months will allow it to pass on any slump in wholesale energy costs to consumers more quickly. Yet experts warn the move will instead give rise to more stealth price hikes.
Scott Byrom, chief executive officer of The Energy Shop, says: ‘What we’re likely to see is a 40 pc increase in October.
‘Then in January, it will probably go up by a smaller amount — perhaps 8pc — and we will see suppliers saying that prices are “only” rising by a little. But it is still a big increase over the long term.’
Indeed, since the cap was launched in 2019, it has risen four times but only been lowered on three occasions. Compared with 2021, it has jumped by 73 pc.
Here, Money Mail talks you through what the changes mean for you.
HOW DOES THE PRICE CAP WORK?
ABOUT 22million households are on their supplier’s standard variable tariff, which is protected by the price cap.
This number will only increase as soaring wholesale gas prices, pushed up further by the conflict in Ukraine, mean fixed tariffs have all but vanished from the market.
In April the price cap increased to an average of £1,971 a year, up from £1,277. If you have a bigger family and use more than the average amount of power, you will pay more.
There is also a cap on so-called standing charges, which cover the cost of providing energy to your home and administration expenses. These are currently limited to 27p a day for gas and 45p for electricity, up from 26p and 25p previously. Many experts are calling for these to be lowered or scrapped, as they unfairly penalise those living alone or in smaller homes, making up a larger proportion of their bills.
WHAT’S CHANGING AND WHY?
THE price cap makes it impossible for suppliers to pass on soaring wholesale energy costs to customers. This has contributed to more than 30 energy companies going bust since last year.
Under current rules, the price cap is updated every six months, in April and October.
But if Ofgem’s proposals are approved, it will be able to change the maximum customers pay every three months from October.
The hope is that reviewing the price cap more frequently will help stabilise the market.
Gillian Cooper, head of energy policy at Citizens Advice, says it will reduce the risk of further supplier failures, which have already left customers with a multibillionpound bill. About £68 of the £1,971 price cap is down to the cost of energy firm failures. But Ms Cooper warns that customers must not be left to pick up the tab for energy market chaos.
Joe Malinowski, from The Energy Shop, says the change may have been dressed up as good news for consumers but it is more about reducing the risk for energy companies. ‘From the consumer side it’s a double-edged sword,’ he says. ‘It will pass on lower costs sooner rather than later, but it will also pass on higher prices.’
WILL THERE STILL BE FIXED DEALS?
CONSUMER expert Martin Lewis warns that the ‘Market Stabilisation Charge’ put forward by Ofgem has slammed the door on cheap deals for customers who switch.
This charge was introduced last month and is levied on firms when they sign up new customers.
It means that if wholesale prices fall dramatically and suppliers want to offer a cheap deal for new customers, they have to pay a fee to the losing supplier.
Under Ofgem’s new proposals, firms will have to pay the fee if wholesale prices drop by just 10 pc, instead of 30 pc currently.
The regulator also wants to increase the charge suppliers pay the previous firm from 75 pc of the money they would miss out on to 85pc. This could kill cheap deals for people switching suppliers, as firms would have to take these extra costs into account when setting prices for new customers.
Previously, the lowest tariffs in the market have been £200 or more cheaper than the price cap level. But this charge will mean the price cap is likely to continue being the cheapest option for some time.
ARE MY BILLS SET TO JUMP?
OFGEM has warned that another steep increase in bills is expected in October, and experts have predicted the average household may have to pay £2,800 a year. Myron Jobson, from Interactive Investor,