Energy price cap will give 11 million a fairer deal from 1 January
Press release
Publication date
Industry sector
Supply and Retail Market
- Customers on default tariffs will save around £76 on average and as much as £120 on the most expensive tariffs
- Price cap will remove around £1 billion of overcharging from consumers’ bills
- Whilst temporary cap is in place protected customers will always pay a fairer price for their energy
Price protection for 11 million customers on poor value default tariffs will come into force on 1 January 2019, Ofgem has confirmed today.
Ofgem has set the final level of the price cap, following the regulator’s statutory consultation published on 6 September, at £1137 per year for a typical dual fuel customer paying by direct debit.
When the price cap comes into force suppliers will have to cut the price of their default tariffs, including standard variable tariffs, to the level of or below the cap, forcing them to scrap excess charges.
The cap will save customers who use a typical amount of gas and electricity around £76 per year on average, with a typical customer on the most expensive tariffs saving £120.
The savings for individual customers will depend on how much energy they use, the price of their current tariff, whether they have both gas and electricity and how they pay for their energy. In total, the price cap will save consumers in Great Britain around £1 billion.
Households protected by the cap will be able to save even more money by shopping around for a better deal.
The price cap level will be updated in April and October every year to reflect the latest estimated costs of supplying electricity and gas, including wholesale energy costs. This will ensure that those protected always pay a fairer price for their energy.
Wholesale costs have risen significantly over the last year. If this trend continues, it is likely that in February Ofgem will announce an increase in the level of the cap to take effect in April. Customers can be confident that any increase in the cap would only reflect changes in the actual costs of providing the gas and electricity they use rather than supplier profiteering so that they will always pay a fair price for their energy.
Dermot Nolan, chief executive of Ofgem, said: “From 1 January, the energy price cap will put an end to customers on default tariffs being overcharged as much as £1 billion for their gas and electricity.
“The price cap will ensure that whether energy costs rise or fall suppliers are not feathering their nest and changes in energy prices will reflect the underlying costs to heat and light our homes.
“Consumers who want to cut their bills further should shop around for a better energy deal and while the cap is in place, we will continue our work to make this as easy as possible.”
Notes to editors
1. The price cap will come into effect at 00.01 on 1 January 2019.
2. After consulting on the price cap Ofgem has made minor adjustments to the level of the price cap to better reflect the real costs of supplying default tariff consumers with gas and electricity. This has resulted in an overall increase in the level of the cap of £1.27p compared to the level set out in the statutory consultation.
The adjustments made are to more accurately reflect the cost of supplying gas and electricity. These include (with all figures rounded):
- an increase of £6 to more accurately reflect the cost of replacing traditional meters before the end of their asset lives with smart meters, and £3 for minor methodology corrections;
- an increase of £2 to more accurately reflect the cost of wholesale gas that is lost in the course of being delivered to people’s homes;
- a reduction of £11 to more accurately reflect the lower costs to suppliers from direct debit customers paying for their energy in advance and the additional cost of serving standard credit customers who pay by cash or cheque.
3. Ofgem is today publishing new information for consumers about the price cap on its website. These pages will be available at www.ofgem.gov.uk/energy-price-caps from 9 a.m. on Tuesday 6 November 2018.
4. Following approval by Parliament, the Government’s Domestic Gas and Electricity (Tariff Cap) Act became law on 19 July. The legislation gave Ofgem a duty and the powers to put the price cap in place, and Ofgem consulted on the proposed methodology and level of the cap between 6 September and 8 October.
5. How much a customer will save is dependent on the level of the default tariff they are on with their supplier and how much energy they use. Customers on more expensive default deals than average will save even more while those on less expensive deals will save less. There are also different levels for customers who pay for their energy by direct debit and those who pay by standard credit.
The price cap is a cap per unit of gas and electricity, with standing charges taken into account. It is not a cap on customers’ energy bills, which will still rise or fall in line with their energy consumption.
The price cap level of £1137 represents a dual fuel customer paying by direct debit who uses a typical amount of gas and electricity, using a measure called Typical Domestic Consumption Values (TDCVs) for a medium gas user and medium electricity user (profile class 1). The per unit level of the price cap for a typical customer paying by direct debit will be 17p per kWh for electricity-only customers and 4p per kWh for gas-only customers. Standing charges are capped at £83 for electricity-only customers, £94 for gas-only customers and £177 for dual-fuel customers.
6. Average savings of £76 are calculated by comparing a weighted average dual-fuel standard variable tariff across the 10 largest suppliers (£1,235) to a weighted average cap level across direct debit and standard credit customers (£1,159), for a standard variable tariff dual fuel customer with typical consumption. This reflects slightly higher overall standard variable tariff prices than the £75 average savings calculated in September.
The average standard variable tariff is based on the most recently announced price data from suppliers as of 31 October 2018, weighted by market share and customer proportions on different payment methods. Some suppliers have more than one standard variable tariff. Where this is the case, we have used the standard variable tariff with the largest number of customers. Data used to calculate the level of the cap are based on 2017 supplier data.
The table below shows the annual average level of the price cap, for a typical dual fuel customer, and the typical standard variable tariff savings for direct debit and standard credit customers for the largest energy firms.
7. Total savings of £1 billion are an estimate of the aggregate savings for all customers on standard variable tariffs protected under the cap. Different consumers will save more or less depending on their circumstances.
8. If the price cap was introduced today we estimate 11 million households would be protected by the price cap, based on the latest customer information from April 2018, including customers on standard variable tariffs and default fixed tariffs. This excludes customers already protected by the prepayment safeguard tariff and the Warm Home Discount safeguard tariff.
9. Vulnerable consumers
Ofgem has already capped bills through its safeguard tariff for 4 million pre-payment meter households. In February this year the regulator extended it to 1 million more vulnerable households on poor value default deals who already received the Government’s “Warm Home Discount”.
These Warm Home Discount households will be transferred on 31 December onto the new price cap for direct debit customers, which has been designed for those on standard, rather than prepayment, meters.
10. Over half of all households in Great Britain are on default tariffs because they have never switched or have not done so recently. Consumers are often automatically put on default deals, usually standard variable tariffs, when they come to end of fixed terms contract deals, with default deals typically more expensive.
11. Ofgem will make an annual report to the Government on the competitiveness of the energy market. The Secretary of State will consider whether the market is competitive enough for the price cap to be lifted each year from 2020, until 2023 at the latest.
Further information
For media, contact:
Kieran Lowe: 0207 901 7108
Media out of hours mobile: 07766 511470 (media calls only)
For investors, contact:
Martin Young: 0207 901 7114
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