Industry voices have given a mixed reaction to Ofgem’s announcement that it is to raise the default price cap on standard variable tariffs (SVTs) by £117 to £1,254 a year.
The price cap for pre-payment meter customers will increase by £106 to £1,242 a year for the same period of a six-month “summer” price cap from 1 April this year.
Lawrence Slade, Energy UK’s chief executive, said the decision to increase prices was not taken “lightly” and that today’s rise reflects the fact suppliers are facing “drastically rising costs”.
Slade added: “We are seeing a number of suppliers exiting the market due to these rises, which in turn places additional costs on all other suppliers.
“Ofgem need to ensure that the cap allows for these mutualised costs to be appropriately recovered, otherwise it is to the detriment of all customers.
“In the meantime, the energy sector is doing all it can to keep costs down for customers – including through the transition to a smarter, more flexible, low carbon energy system.
“However, the most efficient way to keep costs down in the long term is through the more efficient use of energy – which the Committee on Climate Change has shown has saved households £290 per year since 2008.
“We therefore continue to call for the government to introduce a national energy efficiency programme.”
Matthew Vickers, chief executive at the Energy Ombudsman, said: “It’s early days for the price cap, but we believe it’s an important mechanism that will help to protect consumers.
“Given the challenging market conditions facing energy suppliers, it’s right that the level of the cap is reviewed regularly.
“Price is important to consumers but so is good customer service. In fact, there is growing evidence that poor service is just as likely as price to force consumers to switch energy supplier.
“What this comes down to is trust and confidence. People want to feel that they are being treated fairly and paying a fair price for their energy.”
Greg Jackson, Octopus Energy chief executive, said: “The price cap is saving millions of British households money. Anyone who says otherwise is missing the fact that without it the legacy energy suppliers would have raised prices even higher.
“The pain of having to keep prices lower than they’d like is evident in their failed mergers, profit warnings and falling share prices.
“Today’s announcement just reinforces the massive gap between these dinosaur companies and modern retailers who use technology to deliver prices £250 below the cap alongside outstanding customer service.
“If there’s one message people can take from this – you’re safe switching to a better, cheaper company – and do it now before the inevitable big six price rises.”
Energy minister, Claire Perry, said: “As Ofgem has said, these increases reflect the sharp rise in gas and electricity costs.
“The cap is designed to ensure energy companies offer good value to their customers and continue to thrive as an efficient business.”
Stephen Forbes, chief commercial officer, SSE Energy Services, spoke about the dangers of companies setting prices that are too low.
He said: “It’s easy to set a low price if you’re happy to run a loss-making business.
“We’ve seen all too often the consequences of suppliers under-charging, offering loss-making tariffs that ultimately can’t be sustained, leaving them in significant debt.
“And sadly, when these suppliers go out of business, it’s the customers of more responsibly run suppliers who are left to pick up the pieces.
“The price cap was introduced to prevent what many commentators described as ‘unjustified’ price increases.
“But today’s announcement shows that – whether energy prices are set by Ofgem, local authority owned suppliers, devolved Government backed companies, or ‘big’ or ‘small’ suppliers – unfortunately, there is no magic formula to control rising wholesale costs.
“As Ofgem’s chief executive said today, a higher cap isn’t about suppliers profiteering – far from it – it’s about plugging a cost shortfall to ensure responsible businesses can continue to operate sustainably, provide a quality service, employ people and contribute to the economy.”
Gillian Guy, chief executive of Citizens Advice, said it was likely prices would be higher without the cap.
She said: “Unfortunately price rises were inevitable as the cost of supplying electricity and gas to our homes has been increasing.
“As unwelcome as this news is, it’s likely that prices would be higher still without the cap and there are steps people can take to ease the strain on their bills.
“There are big savings to be made by switching supplier or tariff. Simple steps like topping up your insulation, or installing better heating controls, can permanently reduce your bills and make your home more comfortable.”
A rise in wholesale costs was largely blamed for the cap increase, with the regulator estimating that around £74 of the £117 increase in the default tariff cap is due to higher wholesale energy costs, which makes up more than a third (£521) of the overall cap.
Higher wholesale energy costs have similarly pushed up the level of the pre-payment meter cap, Ofgem said.
However not everyone in the sector is happy with today’s announcement, with one industry head calling the rise the “worst possible start” for the cap.
Sally Jaques, head of energy at the auto-switching service Weflip, said: “Just three months after being introduced, the government’s own price cap is set to unintentionally deliver one of the single biggest energy price increases the market has seen for years.
“From April, 11 million households are likely to see their energy bills go up by £117, to £1,254, quickly wiping out any saving received from the cap since in January.
“Before the cap was introduced, the big six competed on price, with their standard variable tariffs varying by around £50 to £100 a year. We are now likely to see them all rise, as one, to the level of the cap.
“The cap review reflects wholesale price movements, and these increases would probably have been passed on to consumers by their providers this year anyway.
“But this increase is the worst possible start for the energy cap and will do little to convince consumers that it is making a big difference.”
Stephen Murray, energy expert at MoneySuperMarket, highlighted similar concerns.
He said: “Today’s £117 rise is even higher than the large increase that was widely predicted over the last few weeks, and it deals an even more significant blow to millions of households who were relying on the cap to save them money.
“The cap was put in place to protect consumers from overpaying on their energy, but right now it’s doing anything but that.
“It’s only taken five weeks for it all to unravel, and households up and down the country will be scratching their heads in confusion and wondering how the claims of ‘fair prices’ and ‘£76 per year saving’ have disappeared, and so quickly.
“The price cap was delivered against a market backdrop that was almost certain to wipe out the initial savings immediately, and that has proved to be the case.
“The cap is determined by a number of external factors, such as the cost of buying energy on the wholesale market, which means it can go up as well as down.
“All this provides scant protection for consumers, compared to the peace of mind of taking control of your bills.”
Richard Neudegg, head of regulation at Uswitch, went as far to suggest people had been “conned” by the cap.
He said: “Ofgem proudly proclaimed that the cap would cut bills by an average of £76 a year when it came into force at the beginning of January – but just weeks later, it’s announcing a jaw-dropping increase. It’s now crystal clear that households were never going to save what was promised.
“We are in a ridiculous situation where standard plans are likely to be in higher in April than before the cap was introduced.
“With bills set to soar by an average of £117 for 11 million homes, Britain needs to brace itself for a billion pound price hike.
“Energy suppliers have traditionally been the ones blasted for blaming price rises on wholesale costs. Now, shamefully, Ofgem is doing the same thing, as the reality of energy prices catches up with the political hype.
“With the cap being reviewed every six months, those remaining on default tariffs should be prepared for the possibility of a state-sanctioned shock to household budgets twice a year.”
Meanwhile Alex Neill, Which? managing director of home services, said: “This eye-watering increase to the price cap will be a shock to the system for people who thought that it would protect them from rising bills.
“Energy customers can take the power back into their hands by switching and securing a better deal before the new cap comes into effect in April.
“While there are fewer cheap deals on the market than a year ago, by switching today you could choose better customer service and potentially save more than £150 a year.”