Households will be left with a smaller windfall than expected as Ofgem this morning slashed the energy price cap for millions of energy customers by a smaller sum than expected.
The regulator said that it would decrease the cap on default tariffs to £1,179 per year for the average household from the beginning of October, a £75 reduction from the previous cap.
“The price caps require suppliers to pass on any savings to customers when their cost to supply electricity and gas falls,” said Ofgem chief executive Dermot Nolan.
The reduction fell short of the expectations of analysts at Cornwall Insight, who had predicted an £83 drop.
Around 11m households are estimated to be on a so-called standard variable tariff – the default customers are put on. Customers who are on a fixed-term contract will not be affected by the energy price cap.
Meanwhile customers with pre-payment meters will see a £25 drop in their annual bills.
‘Good news for 11m households’
Matthew Vickers, chief executive at the Energy Ombudsman, said: “This reduction in the price cap is good news for the 11m UK households on poor-value default tariffs, but shouldn’t discourage people from shopping around for better deals.”
Energy and clean growth minister Kwasi Kwarteng added: “Our action to ensure all consumers pay a fair price for their energy is putting money back in the pockets of up to 11m households.
“The increased competition in the UK energy market facilitated by the energy price cap has enabled more suppliers than ever before to enter the market, driving the innovation and value that we all want to see.”
It is the second time that Ofgem has reviewed the energy price cap since it was introduced in January.
The regulator came under fire in February for jacking up the limit by £117 from April, just weeks after setting the initial cap at £1,137.
Although likely to be welcomed by households, today’s announcement could cause problems for companies in the sector.
In the past 18 months around a dozen energy suppliers have gone out of business, as margins are squeezed in a competitive market.
The companies are also fast approaching a deadline to pay a renewable energy fee, a payment which crippled several suppliers last year.
And the winter months, when this price cap will be in place, can be especially tough for smaller suppliers.
However, it is not just suppliers who will face challenges. If customers are happier with their energy bills, they are less likely to rely on switching services.
In the first quarter of 2019 Moneysupermarket’s home services segment grew its revenue by a massive 70 per cent to £19.6m. The segment includes sales from its switching service which was boosted by the price cap hike.
This morning the company stressed that there was still good reasons for customers to shop around.
“It’s still more than the original level of £1,137 and crucially, there are more than 100 cheaper tariffs available to consumers in the market today,” said Stephen Murray, energy expert at Moneysupermarket.
“That means someone switching today could secure a deal that delivers three times the saving the price cap offers, while protecting themselves from this rollercoaster of price fluctuations every six months. It’s a no-brainer.”
Other experts also insisted that the best way to save money on bills remained switching between suppliers.
‘Cheaper deals available elsewhere’
“On paper, a price cap reduction seems like good news for household energy bills, but the new level of the cap is still £333 more expensive than the cheapest deal,” Uswitch head of regulation, Richard Neudegg, said.
“Ofgem has been able to make this cut thanks to a significant fall in wholesale energy prices since the start of the year. But for customers who stayed put on standard energy tariffs, the price cap doesn’t pass on cost reductions of the same size or speed as switching does, meaning they’ve been stuck paying higher prices for months when much cheaper deals have been available elsewhere.”
‘False sense of security’
Guy Anker, deputy editor of Moneysavingexpert.com added: “There’s a huge risk this reduction in the price cap will lull people into a false sense of security they’re on a decent rate.
“Yet the 11m households on a standard tariff are almost certainly being ripped off now, and will be ripped off after the cut too.
“That’s because standard rates will typically be £300 per year more expensive than the cheapest on the market even after the reduction in standard tariff prices.”