Cap will save 11m households about £76, but wholesale cost rises will drive prices up

This article is more than 1 year old

This article is more than 1 year old

Energy prices are likely to rise just three months after the government’s price cap takes effect on 1 January, Ofgem has admitted.

The energy regulator revealed that the final level of the cap would be £1,137 a year for a typical customer on a default tariff, up by £1.23 on the provisional level it laid out in September.

That should amount to an average saving of about £76 for the 11m households on default tariffs, but any relief for consumers may be short-lived.

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Ofgem noted that wholesale costs are about 35% higher than a year ago. “If this trend in underlying costs continues, it is likely that in February 2019 we will announce an increase in the level of the cap to take effect in April,” it said on Tuesday.

Comparison sites and industry groups warned that more rises were coming despite the cap, and urged people to switch to better deals.

Stephen Murray, an energy expert at MoneySuperMarket, said: “If you do nothing, you could be in for a nasty surprise come spring next year.”

Richard Neudegg, the head of regulation at uSwitch.com, added: “There is a very good chance that the price of standard tariffs will change three times over the next 12 months, and potentially for the worse rather than the better.”

Industry watchers have previously warned that cost pressures on suppliers could drive up bills by 5%, or about £60, by next April.

The government said the cap, which will be updated every six months, would make the market fairer.

Claire Perry, the energy minister, said: “Today’s final cap level brings greater fairness to energy prices and puts consumers at the heart of the energy market.”

But trade body Energy UK said competition was already growing and the cap posed a “significant challenge” to many of the 70-plus suppliers on the market.

MPs and fuel poverty groups also raised concerns over 1m households being shifted from an existing, lower cap for vulnerable customers to the new, higher cap.

Rachel Reeves, chair of the Business, Energy and Industrial Strategy select committee, said ministers needed to: “ensure that vulnerable customers do not slip through the net and actually find themselves worse off.”

Consumer group Citizens Advice said while the cap would make prices fairer for many consumers, they would save more by changing tariff or supplier.

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Which? magazine also pointed out the cap will not touch the third of tariffs above the cap, because they are fixed ones rather than “standard variable” default tariffs.

Ofgem conceded that the number of households switching may go down under the cap, potentially by as much as half, but more likely 30%-40%. That would reverse years of growth in switches, and see millions fewer households changing supplier.

The energy regulator expects the cap will knock 5% off energy firms’ profits, and wipe up to £1.18bn off their revenues. British Gas owner Centrica and SSE, the market’s two biggest players, saw their shares rise by 1.49% and 0.65% respectively.

While the cap is set at £1,137 a year for what Ofgem defines as typical usage of electricity and gas, people who are higher energy consumers will pay more. The cap is the maximum suppliers can charge per unit of energy and for a standing charge.