- Publication date
- 7th August 2017
- Information types
- Policy areas
Ofgem has today updated the level of the prepayment price cap, or safeguard tariff, which will cut bills for around 3 million households by up to £19 a year based on typical consumption.
The change, which takes effect on 1 October, will reduce the level from about £1,067 to £1,048 for a dual fuel prepayment customer who uses a typical amount of energy.(1)
Ofgem introduced the temporary safeguard tariff in April this year and will update it every six months based on a pre-defined methodology to reflect the estimated cost of supplying energy.(2)
The safeguard tariff is aimed at protecting prepayment meter customers, primarily those on poor value standard variable tariffs, from paying too much for their energy.
This is part of our programme to deliver a fairer, smarter and more competitive market for all consumers.
The safeguard tariff applies to households who prepay for their energy, mostly with traditional coin or token operated prepayment meters.(3)
These households are amongst those least able to benefit from competition and are more likely to be in vulnerable circumstances.
The level of the cap will fall for electricity customers with prepayment meters by around £19 a year for a customer with typical consumption.(4) Customers with Economy 7 meters may see smaller reductions.(5) The level of the cap for gas customers has remained broadly unchanged.
The exact impact an electricity customer sees will depend on what tariff they are on, and whether they are currently paying less than the cap. In total, we expect around 3 million prepayment customers to see their bills fall. Most of these customers are on non-Economy 7 tariffs that are close to at the current level of the cap, and so will see almost the full £19 reduction based on typical consumption.
Last month Ofgem announced new plans to protect vulnerable consumers. Ofgem will consult shortly after the summer on proposals, including the option of extending the current safeguard tariff for prepayment customers to more vulnerable customers.(6)
The safeguard tariff is one of the Competition and Market Authority’s (CMA) remedies resulting from its two year investigation of the energy market.
Prepayment customers can still make further significant savings by switching to a cheaper tariff.
The table below shows the current levels of the safeguard tariff, and the updated levels which will apply from 1 October. The values shown include VAT, and are expressed for the current typical domestic consumption values of 3,100kWh of electricity, 12,500kWh of gas, and 4,300kWh of electricity for Economy 7. They are based on simple averages across GB regions.
Period Electricity (non-Economy 7) Electricity (Economy 7) Gas Dual fuel (non-Economy 7) 1 Apr 17- 30 Sep 17 £547.07 £625.85 £520.07 £1,067.14 1 Oct 17 - 31 Mar 18 £528.26 £600.13 £519.74 £1,048.00
For full details of the level of the safeguard tariff in each region and for each fuel see Prepayment price cap: 1 October 2017 to 31 March 2018. Note that the values in this document – which is required by suppliers to understand what tariffs are allowed under the cap – are not directly comparable with the above, as they exclude VAT, and are expressed for levels of consumption different to those used above.
The methodology used to determine the level of the safeguard tariff has been set by the Competition and Markets Authority (CMA). Ofgem is responsible for administering the safeguard tariff and publishing the levels each year in February and August. To calculate the level, we take the benchmark calculated by the CMA, and update this value using a number of different indices to reflect broad trends in costs (this includes an index of wholesale prices, forecasts of environmental levies, and inflation). An allowance for network charges is also calculated, based on network companies’ published charges, which varies by region to take account of the different costs of supplying electricity and gas through pipes and wires around the country. Finally, the safeguard tariff includes a degree of ‘headroom’, included to help ensure that there is room for suppliers to price below the cap. Because the safeguard tariff caps the price of each unit of energy used, not overall bills, the total amount prepayment customers pay per month will continue to vary based on their consumption.
As of December 2015, there were 4.5 million prepayment electricity accounts and 3.5 million prepayment gas accounts, representing 17 per cent of all domestic electricity accounts and 15 per cent of all domestic gas accounts. Note that this does not equate to eight million individual households, as many of these accounts will relate to dual fuel customers with separate electricity and gas prepayment accounts. Electricity prepayment customers with standard single rate meters and other types of other restricted meters are also included.
The reduction for electricity has been driven by lower forecast costs in supplying electricity to prepayment meter customers for the period starting 1 October. Average wholesale electricity prices for delivery this winter and the following summer have fallen while the costs to consumers of the Government’s Capacity Market auction for the coming winter will be lower than expected. The government has established the Capacity Market (CM) as part of its Electricity Market Reform policy. It is intended to incentivise investment in more sustainable, low-carbon electricity capacity at the least cost for consumers to help secure electricity supplies for the future. The auction determining the cost of capacity for the coming winter was held in early 2017.
As the table above shows, a different level of the safeguard tariff applies for the approximately 650,000 prepayment customers with Economy 7 meters. These are meters which allow customers to be charged a lower price for an off-peak ‘night’ period (and conversely a higher price for a peak ‘day’ period). Note that although the level of the safeguard tariff is being reduced for these customers, we are also updating the assumed split of consumption between peak and off peak periods using more up-to-date information, following our recent review of the Typical Domestic Consumption Values. This may partially offset the reductions in Economy 7 prices for prepayment customers that will be brought about by the reduction in the safeguard tariff.
For more background on the prepayment meter safeguard tariff.
To compare prepayment meter tariff prices with the rest of the market, visit Ofgem’s data portal and click on fourth chart under “prices and profits” section.
Further information for media
For further information, contact:
Tim Webb: 0207 901 7179
Media out of hours mobile: 07766 511470
Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.