The government's temporary energy price cap will run until 2020

Courtney Goldsmith
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Around 18m households are on SVTs or other default tariffs (Source: Getty)

The government has published draft legislation to cap energy prices until at least 2020 in an effort to reduce bills for millions of households.

Under the new rules, energy regulator Ofgem will be required to consult and impose an absolute price cap on standard variable tariffs (SVTs), which are default tariffs that can cost hundreds of pounds more than cheaper deals. Around 18m customers are currently on SVTs or other default tariffs.

The Department for Business, Energy and Industrial Strategy (Beis) said the cap will come into effect as soon as practicable after legislation is passed, but it is unlikely to be in place before the winter.

Although the cap is a temporary measure, it could be extended up to the end of 2023 at the latest on the advice of Ofgem.

"It is now up to the energy companies and Ofgem to act – if they fail to act, the legislation will ensure customers get a fair deal," Beis said in a statement.

Prime Minister Theresa May first proposed a cap on energy prices during the General Election campaign, and last week at the Conservative party conference she promised "an end to rip off energy prices once and for all".

Today May said:

I have been clear that our broken energy market has to change – it has to offer fairer prices for millions of loyal customers who have been paying hundreds of pounds too much.

Today’s publication of draft legislation is a vital step towards fixing that, and in offering crucial peace of mind for ordinary working families all over the country.

Energy bills in the UK have doubled in the past decade to average around £1,200 a year.

However, the plans have been criticised over the potential to cause bills to rise in the longer term and make consumers even less engaged with their bills.

Keric Morris, energy partner at management consultant Oliver Wyman, said:

The energy price cap marks a regulatory shift in focus away from ‘switching’ as the primary measure of a healthy market. While the price cap will benefit apathetic customers that don’t switch, it is also likely to push up fixed prices at the lower end of the market as suppliers look to recoup earnings from their most profitable SVT customers. This would result in prices in the market converging, reducing the incentive for customers to switch.

Peter Earl, head of energy at Comparethemarket, said a price cap would not fix the broken market.

"At best, it is a short-term solution which could see some households on the worst value tariffs pay a little bit less for their energy. At worst, it could simply turn people off ever looking at an energy bill again," he said.

Richard Neudegg, head of regulation at uSwitch, added the the bill will lull consumers into a false sense of security.

Ofgem extends price cap

Yesterday, the energy watchdog announced it would extend its price cap on prepayment meters to 1m more vulnerable households this winter.

Ofgem added that a wider cap for all consumers on SVTs would only be possible once legislation was in place.

Read more: Groups slam May's energy price cap as Centrica shares tumble

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