The level of the price cap will fall by £84 from October, Ofgem announces

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OFGEM has announced that the price cap will fall by £84 from £1,126 to £1,042 per year for the winter period (October-March).

This is the lowest level of the cap since it was introduced on January 1 2019.

Jonathan Brearley, chief executive of Ofgem, commented on the announcement: “Millions of households, many of whom face financial hardship due to the COVID-19 crisis, will see big savings on their energy bills this winter when the level of the cap is reduced.

“They can also reduce their energy bills further by shopping around for a better deal.

“Ofgem will continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy market.”

The level of the cap for pre-payment meter customers will fall by £95 from £1,164 to £1,070 per year for the same six month period.

The changes mean that around 11 million households on default tariffs and 4 million on prepayment meters (around half the population in total) will enjoy ‘significant savings’ on their energy bills this winter.

The reduction is due to a sharp decrease in wholesale gas prices since the cap was last updated in February.

The COVID-19 crisis has depressed energy demand although wholesale gas prices have started to recover since hitting 20 year lows in the spring.

If wholesale energy prices continue to rise over the coming months, the cap is likely to rise in April to reflect these higher costs.

Ofgem adjusts the level of the cap twice a year to reflect the estimated costs of supplying electricity and gas to homes for the next six-month period.

Suppliers cannot charge customers who do not switch and are on default deals more than the level of the cap, although they can charge less.

This ensures that these customers pay a fairer price for their energy.

Ofgem has decided to roll the prepayment meter cap into the default tariff price cap (known as “the price cap”) to ensure these households get the protection they need.

The existing prepayment meter cap expires at the end of this year.

Today Ofgem also recommends that the price cap is not lifted at the end of this year and that it should remain in place in 2021 for these households on default tariffs and prepayment meters.

According to the price cap legislation, the price cap can be lifted from 2020 (and no later than 2023) if “the conditions for effective competition” in the domestic retail energy market are in place which would prevent a return to customers on default deals being overcharged for their energy.

From 2020, Ofgem is required to give an annual independent assessment on whether these conditions are in place. The decision on whether to lift the cap rests with the BEIS Secretary of State.

Ofgem’s recommendation is based on its analysis of market features such as customer engagement levels, switching trends, price differentials between tariff types and the quality of customer service provided by suppliers.