Interim Director (Retail)
Under the default tariff price cap, which protects 11 million households, suppliers charge households a fair price for their electricity and gas based on the latest estimated costs to suppliers of supplying it. (1)
So when the cost of wholesale energy plummeted after the outbreak of COVID-19, Ofgem reduced the level of the cap by £84 annually per household per year from October 1 to its lowest ever level, resulting in significant energy bill savings for millions of households this winter.
Ofgem continues to closely monitor costs faced by suppliers so that when they fall, as they did earlier this year, consumers benefit.
However, it’s equally important that when costs go up, suppliers can recover them from consumers within the price cap mechanism.
This helps to ensure that suppliers have the finances to continue to supply energy to their customers and fulfil other licence obligations, including protecting their customers, especially those in vulnerable circumstances.
During the COVID-19 crisis, energy suppliers have stepped up to protect their customers. They have provided emergency credit to customers struggling to top up their pre-payment meters, put those who are behind on their bills on affordable repayment plans and have made sure that no-one has been disconnected from their energy supply on purpose.
Rising bad debts
Due to the impact of the pandemic and higher levels of unemployment we are seeing, more households are struggling to pay their supplier for the energy they have used. This is impacting on supplier finances and we expect the number of unpaid bills to rise this winter.
Debts that suppliers try to collect from people who are unable to pay their bills, including from affordable repayment plans they set up, are called 'bad' debts. Sometimes, suppliers are unable to collect what is owed by their customers.
The existing price cap methodology includes an allowance for suppliers to recover the cost of bad debt expected in normal economic times. But the pandemic has resulted in anticipated bad debts rising to levels that aren’t covered by the cap.
This is why we are now considering whether these higher “bad debt” costs for suppliers should be factored into the default tariff price cap when we next update it from 1 April 2021. In our consultation, we are looking at allowing for an annual increase in costs of £21 per household to allow suppliers to recover these higher costs. (2)
This proposed increase will be partially offset by the ending of a temporary £15 increase to reflect the outcome of a judicial review into how Ofgem calculated suppliers’ wholesale energy costs in the first cap period. The net impact on bills of these two changes would be an increase of around £6.
We will continue to monitor the market and the costs of supplying energy and engage very closely with suppliers as the impact of COVID-19 on supplier finances continues to evolve.
Shop around for a better deal
Wholesale electricity and gas which suppliers buy to supply their customers is the biggest single cost that makes up the price cap. While wholesale prices plummeted earlier this year, in recent months they have started to recover. If this trend continues, this will result in an increase in the level of the cap in April next year, although it is difficult to predict energy prices and the pandemic increases the uncertainty around their future direction.
It’s always unfortunate whenever energy bills rise. If the level of the cap does increase in April, this would be for the six-month period over summer when people use less energy and their energy bills are lower.
While the cap ensures households pay a fair price for their energy, it isn’t the best price. Customers who are on default deals could get a cheaper deal by shopping around, potentially saving hundreds of pounds a year. As always, we encourage consumers to shop around this winter.
Working with suppliers
Our priority throughout COVID-19 has been to ensure that consumers remain protected, especially those in vulnerable circumstances.
We’re pleased by the response of the industry this far, with many of them doing the right thing by their customers and helping them through these unprecedented times.
We have also strengthened protections for customers who are struggling to pay their energy bills this winter. From December 15, Ofgem is introducing licence conditions requiring suppliers to offer emergency credit to customers struggling to top up their prepayment meter and to put customers in debt on realistic and sustainable repayment plans. This means that those in financial distress will get some breathing space but ultimately all customers need to pay for the energy they use.
We will continue to work with suppliers to ensure they can continue to protect their customers in the difficult months ahead.
1. The default tariff price cap, which was introduced on 1 January 2019, protects around 11 million households on default, including standard variable, tariffs. The price caps are a cap on a unit of gas and electricity, with standing charges taken into account. They are not a cap on customers’ overall energy bills, which will still rise or fall in line with their energy consumption. More information about the price cap is available at: www.ofgem.gov.uk/energy-price-caps
2. The proposed increase of £21 per year is based on a household with typical consumption on a dual electricity and gas bill paying by direct debit