Ofgem cuts energy price cap but bills are still set to rise

Household energy bills are forecast to be hundreds of pounds a year lower than expected in the second half of this year, falling below the government’s £3,000 price guarantee after a sharp drop in wholesale prices.

The energy regulator has cut its price cap by £999 but households are still expected to see a rise of up to £500 in their bills from April.

Ofgem has reduced the cap on the amount that energy suppliers would be able to charge a dual-fuel household from £4,279 to £3,280 from April 1. However, at the same time the government’s energy price guarantee, which determines the price households are actually charged at present, is becoming less generous.

The energy price guarantee was introduced in October to reduce the amount a household could be charged per unit of gas or electricity. It initially limited bills for the average household to £2,500 a year — based on what a dual-fuel (gas and electricity) direct debit customer with typical consumption levels would face if these prices remained constant across a year.

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The guarantee is due to rise by 20 per cent — or £500 — to £3,000 from April 1, pushing up energy bills by the same amount. Despite the quarantee, household that use more energy will pay more and those that use less will pay less as annual bills are not capped.

The increase comes at the same time that the £400 energy bills support scheme — paid in six instalments of £66 and £67 a month — comes to an end, which will push up energy bills even more.

Martin Lewis, the personal finance expert, has called on ministers to delay the rise in the guarantee to ease the burden on households facing the biggest squeeze on incomes since the 1950s.

He has urged the chancellor, Jeremy Hunt, to scrap the increase to £3,000 before the budget on March 15. He said in a letter to the chancellor three weeks ago: “In practice, energy firms will need to know much sooner if the planned rise isn’t happening on April 1, or they are bound to have to communicate to customers that it is coming.”

At the moment the Ofgem cap remains above the government’s guarantee. However, with wholesale prices falling, it is expected that the cap will be below the guarantee by mid-summer. Analysts at the energy market consultancy Cornwall Insight expect the cap to fall to £2,153 in July.

Lewis said the rule is that if the cap drops below the guarantee, households will pay the lower amount. “So from that point, unless wholesale prices rocket again the energy price guarantee will be irrelevant and we will go back to paying the lower cap price,” he said.

Craig Lowrey, principal consultant at Cornwall Insight, said: “While tumbling cap projections are a positive, unfortunately already-stretched households will be seeing little benefit before July.”

Falling energy prices means that the cost of the guarantee to the government has fallen from the £12.8 billion predicted in November to £1.5 billion, according to the Resolution Foundation.

Lewis has said that the extra money could be used to help people struggling to pay their energy bills by postponing the rise in April. “This will cost the government money compared to not doing this. But it is going to cost the government substantially less money than it expected to spend,” he told Today on BBC Radio 4.

The Treasury has argued that receipts from the windfall tax on energy producers are set to be lower than expected. The Office for Budget Responsibility has predicted receipts will be £7 billion less, although Treasury sources have said the figure is closer to £12 billion.

Jonathan Brearley, the Ofgem chief executive, said: “Although wholesale prices have fallen, the price cap has not yet fallen below the planned level of the energy price guarantee. This means that, on current policy, bills will rise again in April. I know that for many households this news will be deeply concerning.”

“However, today’s announcement reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won’t make an immediate difference to consumers, it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease. If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower.”

Dame Clare Moriarty, chief executive of Citizens Advice, said the number of people who cannot afford their energy bills will double.

She told Today: “For most people, on average, we’re going to see a £900 increase in people’s bills. Now we know that that’s going to be unsustainable for very many people. We estimate that the number of people who simply won’t be able to afford their energy bills will double.

“So we’ll go from one in ten people to one in five people. That is a huge number of people. That’s why we’re saying that the government has to keep the energy price guarantee where it is at the moment — £2,500.”