A drop in wholesale energy prices due to the coronavirus pandemic has resulted in the price cap being lowered to its lowest level yet, Ofgem has announced today (7 August).
The energy regulator said the default tariff cap will fall by £84 to £1,042 on 1 October, while the cap for prepayment meter (PPM) customers will fall by £95 to £1,164.
Covid-19 has suppressed energy demand and resulted in a sharp decrease in gas prices, which hit 20-year lows this spring. Yet wholesale gas prices have started to recover and Ofgem has warned the cap is likely to rise next April to reflect this.
Furthermore, Ofgem will recommend to the secretary of state that the price cap is not lifted at the end of this year and that it should remain in place in 2021.
By law, the cap can be lifted from 2020 if there are “conditions for effective competition” in the domestic energy retail market which would prevent a return to customers on default deals being overcharged for their energy.
Following its assessment of the market, Ofgem will recommend the cap is not lifted at the end of this year.
Jonathan Brearley, chief executive of Ofgem, said: “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.”
Responding to the announcement, Energy UK’s chief executive, Emma Pinchbeck, said: “Since the Covid-19 pandemic struck, suppliers have increased the support they provide to their customers, particularly those in vulnerable circumstances. Many more households will be dealing with the impacts of the pandemic for some time to come and energy suppliers will continue to support them as much as possible.
“Lower wholesale prices are only part of the story – because of Covid-19, energy suppliers are facing likely increases in debt and other rising system costs, in an industry which already operates on small margins.
“The industry will keep working to help households through this challenging time – and to support the economy as we build back better – but it is more important than ever that we have a healthy and competitive retail market to serve our customers.
“The most effective way to reduce bills over the longer term is to make our homes more energy efficient. The recently announced Green Homes Grant scheme is an important step and we hope to see more support for the green recovery in the government’s spending plans later this year.”
Ed Dodman, director of regulatory affairs at the Energy Ombudsman, said: “This reduction in the price cap represents a much-needed financial boost for millions of households at a time when many people are struggling due to the economic impact of Covid-19 and lockdown.”