The proposed cap should save the typical prepay customer around £80 a year, according to Ofgem. The precise levels of the cap will vary with meter type and region.
Ofgem’s clarification of the initial levels for the prepay price cap comes ahead of the implementation of the restriction in April this year. It is expected to affect around four million UK households.
The cap was recommended by the Competition and Markets Authority (CMA) following its two-year investigation into the energy market. It is a temporary measure which is panned to come to an end in 2020, after the rollout of smart meters.
Explaining how the cap will impact suppliers, Ofgem said the it will require many to “make significant reductions to their prepayment gas tariffs. For most of the large suppliers, we expect these reductions to be around 10-15 per cent”.
The cap will also require many suppliers to make significant reductions to their Economy 7 tariffs. “Again, the scale of these reductions will vary a lot by supplier – most of the large suppliers will be required to make reductions in the region of 5-15 per cent”.
The impact on prepay electricity tariffs will be lower and in many cases Ofgem anticipates that suppliers will not need to make any reductions to their existing electricity prepayment tariffs. It explained: “This is because the indices of electricity costs used to calculate the cap have risen since the CMA benchmark was set in 2015, while electricity prices have generally remained flat”.
Commenting on the level-setting announcement, Dermot Nolan, chief executive of Ofgem, said: “We want all consumers to enjoy the benefits of a more competitive energy market, regardless of their circumstances.
“Customers who prepay for their energy are denied the best deals on the market available to those using other payment methods. They are also more likely to be in vulnerable circumstances, including fuel poverty.”
He added that the introduction of a temporary price cap will “protect these households as we work to deliver a more competitive, fairer and smarter market for all consumers.”
Citizens Advice welcomed the additional clarity around the price cap and said it “should stop some of the poorest households paying over the odds to heat and light their homes”.
However, the consumer charity also urged Ofgem to go further to protect customers from unfair pricing. Chief executive Gillian Guy said: “The cap set by Ofgem will help millions save money but action shouldn’t stop there.
“The government has rightly expressed concern that loyal customers on standard tariffs are paying over the odds for their gas and electricity. It could help more struggling households, including low-income pensioners and families, by extending this cap to people eligible to receive the Warm Homes Discount.”
Ofgem is due to update its levels for the prepayment price cap in February and August each year. The methodology for the measure was devised by the CMA.