Ofgem sets prepayment price cap to protect over four million households least able to benefit from competition

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  • The temporary cap is expected to save many typical prepayment customers around £80 a year from April 2017
  • Prepayment customers are denied the best deals and are more likely to be in vulnerable circumstances
  • The cap is part of our work to deliver a more competitive, fairer and smarter energy market for all consumers.

Ofgem has today announced the levels of the prepayment price cap which come into effect this April.

The temporary price cap is one of the Competition and Market Authority's (CMA) remedies resulting from its two year investigation of the energy market.

The cap will initially apply to over four million households who prepay for their energy, mostly with traditional prepayment meters, and are amongst those least able to benefit from competition.

The levels of the cap vary for electricity and gas, by meter type and region. 

Ofgem estimates that many prepayment customers are likely to see reductions in their gas bill of around 10-15% from 1 April 2017 or around £80 a year based on a typical household’s consumption. 

Many prepayment customers who use electricity to heat their home such as those on Economy 7 meters will see their electricity bill fall, with reductions of around £80 a year based on a typical household’s consumption. 

The CMA found that prepayment meter customers face particularly high levels of detriment.

Competition among suppliers for prepayment customers is less developed than for those who pay by direct debit, cash or cheque. This means that there are fewer tariffs available to these customers and the tariffs that are available are generally more expensive.

Customers with prepayment meters are also more likely to be in vulnerable circumstances than those paying by other means. 

The cap is due to expire at the end of 2020 when the roll out of smart meters is set to be completed, which will help prepayment meter customers in particular access better deals. 

Dermot Nolan, chief executive of Ofgem, said: “We want all consumers to enjoy the benefits of a more competitive energy market, regardless of their circumstances. Customers who prepay for their energy are denied the best deals on the market available to those using other payment methods. They are also more likely to be in vulnerable circumstances, including fuel poverty. This temporary cap will protect these households as we work to deliver a more competitive, fairer and smarter market for all consumers.”

Notes to editors

1. As of December 2015, there were 4.5 million prepayment electricity accounts and 3.5 million prepayment gas accounts, representing 17% of all domestic electricity accounts and 15% of all domestic gas accounts. Please 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. Many of these households are on coin or token operated meters and include electricity prepayment customers with standard single rate meters, Economy 7 meters and other types of restricted meters. There are about 650,000 prepayment customers with Economy 7 electricity meters. 

2. The methodology used to determine the level of the cap has been set by the CMA. Ofgem is responsible for administering the price cap and publishing the cap levels each year in February and August (separate values will be published for each meter type and region). 

3. To calculate the level of the cap, 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. This component of the cap varies by region. Finally, the cap includes a degree of ‘headroom’, included to help ensure that there is room for suppliers to price below the cap.

4. The impact that the cap will have on the prices paid by a prepayment customer as of 1 April will vary significantly depending on what tariff they are currently on, and how much energy they use. We expect that:

  • The cap will require many suppliers to make significant reductions to their prepayment gas tariffs. For most of the large suppliers, we expect these reductions to be around 10-15%  (or around £80 a year for a typical prepayment gas customer) 
  • The cap will also require many suppliers to make significant reductions to their Economy 7 tariffs. Again the scale of these reductions will vary a lot by supplier – most of the large suppliers will be required to make reductions in the region of 5-15% (or around £80 a year for a typical prepayment Economy 7 customer).

5. In many cases, the cap will not require suppliers to make any reductions to their electricity prepayment tariffs for those customers with standard, single-rate meters. This is because the indices of electricity costs used to calculate the cap have risen since the CMA benchmark was set in 2015, while electricity prices have generally remained flat.

6. For a table showing the level of the cap for each region and meter type, see Prepayment price cap: 1 April 2017 to 30 September 2017. For background information on the price cap, see Prepayment meter price cap.

7. Ofgem is working to deliver a fairer, more competitive and smarter energy market for all consumers. Read more about what else we are doing to help consumers on pre-payment meters and more generally those in vulnerable circumstances.

About Ofgem

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.

For facts, figures and information about Ofgem’s work, see Energy facts and figures or visit the Ofgem Data Portal.

Follow us on Twitter @ofgem and LinkedIn

Further information for media

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