Ofgem will likely announce a drop in the energy price cap next Friday, ahead of the change being implemented in October, meaning consumer bills will fall for the second time this year.
According to Cornwall Insight analysts, the new cap – which determines how much suppliers can charge per unit of energy – will fall from £2,074 currently to £1,926 on October 1.
Though this figure is what an average household would pay over the course of a year under the pricing mechanism, the new cap will see suppliers charging less per unit of gas and electricity.
Concerns have repeatedly been raised over the price cap in recent weeks, given that it allowed the likes of British Gas and Eon to secure profits by hiking bills early this year.
“While a small decrease in October’s bills is to be welcomed, we once again see energy price forecasts far above pre-crisis levels, underscoring the limitations of the price cap as a tool for supporting households with their energy bills," Cornwall Insight consultant Craig Lowrey commented.
On top of the fact that the pricing structure has led to the collapse of 30 energy suppliers since 2021, a report from comparison site Uswitch shows that the majority of billpayers don’t know what the cap even does, dealing another blow to Ofgem’s way of determining costs.
According to Uswitch, 54% of Britain’s customers “aren’t sure what the cap is or what it does” and 68% of those on variable tariffs don’t know these change every three months.
"As many [...] have acknowledged, it is essential that the government explore alternative solutions," Lowrey added.
So in light of growing scrutiny of how the cap works, including ironically from Ofgem boss Johnathan Brearley himself, here’s a bit of background.
What is the price cap?
Having been introduced in 2019, the price cap is meant to provide a ceiling on how much energy suppliers can charge households for power.
This is done by placing a cap on the amount that can be charged per unit of gas and electricity, which currently sits at 8p and 30p per kilowatt-hour respectively.
How much the average typically consuming household would then pay on an annual basis is the figure displayed in Ofgem’s price cap.
For the quarter from July to October, this was set at £2,074. However, given the cap actually determines unit prices, households could end up paying more or less than this over a year.
A host of factors contribute to the final figure, including, of course, the wholesale price of energy, but also the likes of network and operating costs.
Thanks to allowances in Ofgem’s caps so far this year, suppliers such as British Gas and Eon have been able to hike bills to recoup losses faced early on during the energy crisis.
This ultimately saw British gas pen a near-900% rise in operating profit during the first six months of the year – sparking heated scrutiny on Ofgem given many households are still struggling with high prices.
On the plus side, when Ofgem introduced its current cap in July, energy prices fell for first-time for since February 2020.
Though the government’s energy price guarantee had limited average bills to £2,500 for ten months from October, the drop reflected lower wholesale prices, which dipped below pre-Ukraine war levels last December.
UK Natural Gas (GBp/thm) late 2018 - current - Trading Economics
Owing to higher wholesale prices, the price cap has effectively become a means for suppliers to determine how much to charge, rather than a maximum limit on prices.
“Unfortunately, the price cap alongside other Ofgem rules currently in place, have failed to bring about meaningful competition,” Uwitch director Richard Neudegg explained.
“Suppliers have no incentive to offer better prices to anyone […] and when suppliers have no incentive to attract new customers, consumers lose out.”
A lower cap, as anticipated by analysts, would mark the second fall this year for the majority then, following sustained increases in the price cap from early 2020 to last April.
Historical price cap figures:
- January 2019 - £1,137
- August 2019 - £1,179
- February 2020 - £1,042
- February 2021 - £1,138
- August 2021 - £1,277
- April 2022 - £1,971
- October 2022 - £3,549 (£2,500 government price guarantee introduced)
- January 2023 - £4,279
- April 2023 - £3,280
- July 2023 - £2,074 (government price cap raised to £3,000)
- October 2023 - ?
Regardless of the murmurings from researchers, energy companies and even regulators on whether the cap’s mechanics should change, the system in place looks set to stay in the meanwhile, with next Friday set to grace us with how much we will pay for energy this winter.