Price cap to increase by £693 from April, Ofgem announces

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The energy price cap will increase from 1 April for approximately 22 million customers, with those on default tariffs paying by direct debit will see an increase of £693 from £1,277 to £1,971 per year (difference due to rounding).

Prepayment customers will see an increase of £708 from £1,309 to £2,017.

According to the regulator, the increase is driven by a record rise in global gas prices over the last six months, with wholesale prices quadrupling in the last year.

It will affect default tariff customers who haven’t switched to a fixed deal and those who remain with their new supplier after their previous supplier exited the market.

Jonathan Brearley, chief executive of Ofgem, commented on the announcement: “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.

“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.

“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”

The price cap is updated twice a year and tracks wholesale energy and other costs.

It stops energy companies from making excessive profits, ensuring customers pay no more than a fair price for their energy.

The price cap allows energy companies to pass on ‘all reasonable costs’ to customers, including increases in the cost of buying gas.

According to Ofgem, since the price cap was last updated in August, the current level does not reflect the unprecedented record rise in gas prices which has since taken place.

Under the price cap mechanism, energy companies will be allowed to pass on these higher costs from April when the new level takes effect.

This is because energy companies cannot afford to supply electricity and gas to their customers for less than they have paid for it.

Over the last year, 29 energy companies have exited the market or been put in special administration in the wake of soaring global gas prices, affecting around 4.3 million domestic customers.

Tomorrow Ofgem is set to announce further measures to help the energy market weather future volatility by increasing financial resilience and have the flexibility to respond so that risks are not inappropriately passed on to consumers. This follows measures announced in December.

The further measures to be announced tomorrow include:

  • Introducing an uplift in the wholesale cost allowance in the price cap: after reviewing the evidence, Ofgem has decided that the existing price cap methodology did not appropriately account for the additional wholesale energy costs energy companies have incurred during the current price cap period following the unprecedented scale of wholesale energy prices and volatility. This adjustment represents less than 10% of the overall price cap increase.
  • Changing licence conditions to give Ofgem the more flexibility to change the price cap level if needed in between the regular six-monthly cap updates: Ofgem has set itself five tests which mean it will only expect to use the power in exceptional circumstances.
  • Further reforms to the price cap from October: In December Ofgem set out three options to make the price cap more robust to high and volatile wholesale energy costs while preserving as far as possible the benefits of the price cap for consumers. The consultation published tomorrow will include all three options, with quarterly updates as Ofgem’s preferred option.