Lower energy bills are on the way for millions of households as energy market regulator Ofgem slashes bills price cap to £1,042 per year, from its previous level of £1,126, for the next six months (October-March).
But Ofgem admits millions of households could pay less by switching from standard (default) variable rate tariffs to cheaper fixed term tariffs.
If you have never changed gas or electricity rates, or if you haven’t done so for more than two years, you are in a situation where you are likely to save money by moving your business.
The £84 drop in the price cap means it has hit its lowest level since it was introduced at government request in January 2019.
Falling wholesale energy prices facilitated the reduction, but market watchers have expressed concerns that an increase in wholesale gas prices over the next few months, especially if the winter is harsh , could cause the gap to widen in 2021.
Any recovery in economic activity as the country adjusts to the current coronavirus crisis is also likely to boost demand, again putting upward pressure on prices.
The cap level for prepaid meter customers will drop from £95 to £1,070 per year for the same six-month period.
The ceiling limits the unit cost
The £1,042 per year main cap level is based on a household with typical consumption on a double electricity and gas bill paying by direct debit.
Customers paying by standard credit (cash or cheque) pay an additional £79 based on the higher cost for vendors to serve them.
The cap isn’t a limit on how much you pay – it’s a limit on how much you can be charged per unit of energy, taking into account ongoing charges.
The more energy you use, the higher your bill will be and, therefore, it may exceed the cap.
Savings for 15 million households
Ofgem says the changes mean that around 11 million households on default tariffs and 4 million on prepayment meters (around half the total population) will benefit from significant savings on their energy bills this winter.
Ofgem adjusts the level of the cap twice a year to reflect the estimated costs of supplying electricity and gas to households for the next six month period.
Providers cannot charge customers who do not switch and are on default offers more than the cap level, although they can charge less.
Energy providers are offering fixed tariffs that cost significantly less than the cap level – which Jonathan Brearley, Chief Executive of Ofgem acknowledges: “Millions of households, many of whom are facing financial hardship due to the crisis of COVID-19, will see big savings on their energy bills this winter when the ceiling level is reduced.
“They can also lower their energy bills further by looking for a better deal.”
The government has asked to extend the ceiling
Ofgem has also announced that it will integrate the prepayment meter cap into the default price cap to ensure that households using prepayment meters get the price protection they need. This is done because the current cap on prepayment meters expires at the end of this year.
Ofgem also recommends that the price cap should not generally be lifted at the end of this year and remain in place in 2021 for households on default tariffs and prepaid meters.
The decision whether or not to lift the cap rests with the government.