Ofgem increases level of safeguard tariff due to higher wholesale costs

Publication date
7th August 2018
Information types
Policy areas
  • Safeguard tariff protects households from overpaying for their energy and from unjustified price rises
  • Level of safeguard tariff to rise by £47 per year in October due to higher wholesale energy costs
  • 5 million prepayment meter and vulnerable households who are protected by safeguard tariff are still better off

Ofgem has updated the level of the safeguard tariff, which protects 5 million households from being overcharged, based on the latest estimated costs of supplying energy.

From October 1, the level of the safeguard tariff will rise by £47 per year for dual fuel customers to £1,136.

The rise is due to higher wholesale gas and electricity costs since the level was last updated in February. This is mostly due to the global rise in oil prices feeding through to wholesale gas prices which impacts both domestic heating and electricity generation.

The safeguard tariff stops suppliers from overcharging customers on poor value deals because suppliers have to keep their prices below the level of the safeguard tariff. It was introduced in April last year for prepayment meter customers.

In February this year, Ofgem extended the safeguard tariff to protect 1 million more vulnerable consumers who are on poor value standard variable tariffs and receive the Government’s “Warm Home Discount”.

Ofgem adjusts the level of the safeguard tariff twice a year, based on a pre-defined methodology set by the Competition and Markets Authority to reflect the estimated underlying costs of supplying energy.

This ensures that any price increase is justified by rises in underlying costs. 

Ofgem is currently working to put in place a price cap for the remaining estimated 11 million households on poor value default tariffs by the end of the year following publication of a statutory consultation later this month.

Dermot Nolan, chief executive of Ofgem, said: “Around 5 million households, including some of the most vulnerable, remain better off and are no longer overcharged for their energy thanks to the safeguard tariff.

“Any price rise for customers is unfortunate. But while the level of the tariff will rise in October, these customers can be confident that this increase is justified and that their energy bill reflects the real cost of supplying gas and electricity. There are also better deals on the market for those who want to save even more money by switching.

“Ofgem is working to put in place price protection for 11 million more households on poor value deals so that everyone pays a fairer price for their energy.”

Notes to editors

1. The average level of proposed savings is for a household which consumes a typical amount of electricity and gas.

2. Why are wholesale prices rising?

The main driver of higher wholesale costs has been in the increase in the global oil price, which has risen by from $50 per barrel to $75 per barrel since this time last year. As the price of the gas Britain imports from Norway and the rest of Europe is linked to the oil price this has pushed up the price of gas which heats our homes and is also used gas fired power stations to provide around 40% of our electricity. In addition to this there have been increases in the cost of carbon trading which again has made the gas and coal we use more expensive.

3. What is a safeguard tariff?

A safeguard tariff caps protects consumers from overpaying for their energy. Suppliers cannot charge more than the level of the tariff but can price below it. 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. 

4. The table below shows the current levels of the safeguard tariff, and the updated levels which will apply from October 1. They are based on simple averages across GB regions. The values shown include VAT, and are expressed for the current typical domestic consumption values of 3,100kWh of electricity, 12,000kWh of gas, and 4,200kWh of electricity for Economy 7.

The Typical Domestic Consumption Values (TDCVs) were updated in 2017 to reflect reducing average consumption due to increasing efficiency. Previous publications on the levels of the PPM safeguard tariff used the previous TDCV values, and are therefore not exactly the same as current values.

Period

Electricity (non-Economy 7)

Electricity (Economy 7) 

Gas

Dual fuel (non-Economy 7)

1 Apr 17 - 30 Sep 17

£547

£614

£503

£1,050

1 Oct 17 - 31 Mar 18

£528

£589

£503

£1,031

1 Apr 18 - 30 Sep 18

£562

£635

£527

£1,089

1 Oct 18 - 31 Mar 19

£581

£661

£555

£1136

For full details of the level of the safeguard tariff in each region and for each fuel see safeguard tariff level: 1 October 2018 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. 

5. Breakdown of changes in supplier costs used to calculate safeguard tariff:

 

Summer 2017/18

Winter 2017/18

Summer 2018/19

Winter 2018/19

Wholesale energy

£361

£352

£378

£421

Network

£257

£258

£258

£257

Policy

£125

£112

£135

£134

Other

£166

£168

£171

£172

PPM uplift

£64

£65

£66

£67

Headroom

£28

£27

£29

£31

VAT

£50

£49

£52

£54

Set level of Safeguard Tariff

£1,050

£1,031

£1,089

£1136

6. For more background on the safeguard tariff.

Further information

For media, contact:

Kieran Lowe: 0207 901 7108

Media out of hours mobile: 07766 511470 (media calls only)

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