Industry experts are predicting that the default tariff cap will significantly fall in the second quarter of 2024, thanks to a decrease in wholesale prices.
Ofgem’s last quarterly price cap update, published in November, saw the price cap rise by 5% following a rise in wholesale costs. This means that from 1 January 2024 around 29 million consumers will see the cap increase, with an average dual fuel direct debit customer paying £1,928.
Yet experts at Investec and Cornwall Insight believe a subsequent dip in wholesale costs will result in decreases of more than £200 when the April cap comes into effect.
In its latest release Investec is predicting the Q2 2024 cap will be £1,705, before falling to £1,641 in Q3 and then rising to £1,693 in Q4.
“These represent the lowest cap levels since winter 2021/22, although still being well above historic levels, we stop short of suggesting that they bring Christmas cheer. For many, the cost of energy/living crisis remains acute,” it said.
Elsewhere, Cornwall Insight is predicting an even bigger decrease in the cap.
Its latest analysis forecasts that the cap will fall by 14% in Q2, with a typical dual fuel consumer expected to pay £1,660 per annum, a £268 decrease from January bills of £1,928.
In July it predicts the cap will fall further still to £1,590 before another increase to £1,640 from next October.
The consultancy explained: “Since mid-November, wholesale energy prices have experienced a significant decline, triggering the anticipated drop in the price cap.
“Contrary to initial concerns, the Israel-Hamas conflict and problems such as potential LNG production strikes in Australia have as yet failed to materially impact energy supplies. Additionally, the absence of further pipeline disruptions, similar to the Finnish Balticconnector rupture, further bolstered confidence in energy security.
“These factors, coupled with a relatively mild winter to date, have left European gas-in-store levels above expectations for the remainder of winter. This situation has helped to drive down wholesale prices, as seen in the current forecasts of the price cap.”
It further warned that prices may rebound if future incidents, such as the disruption to shipping through the Red Sea, raise concerns over disruption to supplies.
Craig Lowrey, principal consultant at Cornwall Insight, said: “The recent stabilisation of international energy markets has trickled down to April’s price cap predictions, raising hopes that this downward path will continue throughout the remainder of 2024.
“However, history has shown that the wholesale energy market is highly volatile, and unexpected global events can lead to spikes in energy prices, ultimately feeding through to household bills – as we saw this time last year. Whether concerns in the Red Sea become heightened, or another potential disruption to supply occurs, there are no guarantees the price cap will not rise again.
“The current scarcity of fixed deals lower than the cap further complicates the situation. With few affordable alternatives, households are left at the mercy of market fluctuations.
“Ongoing consultations, including over the treatment of standing charges and the costs associated with bad debt collection, contribute to the uncertainty, and we await to see how any changes will influence bills.
“Ultimately, waiting and hoping that we will avoid another global incident that sends energy prices climbing is not a sustainable strategy for government. To achieve substantial reductions below pre-crisis levels, we must focus on long-term strategies which increase domestic renewable energy sources and reduce our reliance on volatile imports.”