The price cap, love it or loathe it, has been a cause of some serious contention over the last six months.

To some, it has protected UK consumers from skyrocketing bills.

For others, it is a form of reckless protectionism that has caused dozens of energy businesses to close.

In the last few days though, Ofgem have announced that the level that the price cap is set at is due to change.

But what will it raise to, and what does it mean for UK consumers?

The Energy Price Cap Rises

The price cap for energy is set to increase from the 1^st of April. This move will affect roughly 22 million customers throughout the UK, with those on default tariffs paying by direct debit likely to see an increase of £693 (from £1,277 to £1,971) per year. Prepayment customers are dealt a heavy blow too, with an increase of £708 (from £1,309 to £2,017).

As many are all too aware at this point, the increase is primarily driven by a record rise in global gas prices over the last six months. In the wholesale markets, prices have more than quadrupled.

The news of the energy price cap being raised will mostly affect default tariff customers who haven’t switched to a fixed deal or customers who choose to remain with their new supplier after their previous supplier exited the market. Of which, there are many…

This raise in the price cap is not an anomalous event, as the cap is updated twice a year and will track in line with wholesale energy prices and other associated costs. The reasoning behind this is to stop energy companies from exploiting customers on the way to making excessive profits, ensuring customers pay a fair price for their energy consumption. The cap is intended to allow energy companies to pass on all reasonable costs to their customers, which does also include the recent cost increases for buying gas.

The cap was last updated in August, so the current level doesn’t really reflect the record rise in gas prices that we have seen recently. Under the price cap mechanism that operates in the UK energy markets, energy companies will now be able to pass on these higher costs from the 1^st of April onwards (when the new level is implemented). Currently, energy companies simply cannot afford to supply electricity or gas to their customers for less than the price that they themselves have paid for it.

This is demonstrated by the staggering amount of energy companies that have exited the market in recent times. 29 so far have either exited or been put into special administration, affecting around 4.3 million domestic customers.

What Do Ofgem Have To Say?

On a statement on their website the Chief Executive of Ofgem, Jonathan Brearley, had this to say –

“We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.”

“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.”

“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”

This comes with the news that Ofgem will announce further measures to help the energy market withstand future price volatility by increasing financial resilience and increasing the flexibility to respond, thus ensuring that risks are not inappropriately passed onto consumers.

These measures include enabling Ofgem to update the price cap more frequently than once every six months, but only in exceptional circumstances. This is hoped to establish a price cap that more closely reflects the true cost of supplying energy.

Help For Customers

If you feel worried at the thought of paying more on your energy bills, then there is help in place to aid you:

If you are struggling to pay your energy bills, then you should contact your energy supplier as soon as possible. Depending on the circumstances then it may be possible to qualify for additional help with energy bills or services. Debt repayment plans, payment breaks, emergency credit for prepayment metered customers, priority support and schemes like Winter Fuel Payment or Warm Home Discount Rebate are all realistic options. You can find comprehensive information on UK energy suppliers Here.
The Breathing Space Scheme is a scheme in place for households to receive advice on their debts and find a solution to the problem. Breathing space will last for 60 days for as long as you remain eligible. During this time all creditors who have been included will be informed to stop any collection or enforcement activity. As the breathing space ends, creditors will be able to resume collecting the debt in the usual way. If this sounds like it appeals to you, please call the National Debtline on 0808 808 4000.
It is also possible to contact the Citizens Advice consumer service for advice on how customers can resolve any problems with their energy supplier. It is possible to contact them via webchat on their website, or by calling 0808 223 1133. If you believe your case to be complex or particularly urgent, or there is a person in a vulnerable situation, then they may then be referred forward to the Extra Help Unit.

Further Measures Announced

Ofgem have also announced the following measures:

An uplift in the wholesale cost allowance in the price cap: Ofgem have decided that the pre-existing price cap methodology did not appropriately account for the additional wholesale energy costs that energy companies have incurred recently. This follows on from unprecedented highs and volatility in wholesale energy prices. The adjustment represents less than 10% of the overall price cap increase.
Modified licence conditions: This move is hoped to give Ofgem the flexibility to change the price cap level if needed in between the usual six-month cap updates. There have been five tests set to limit use to only exceptional circumstances.
Further price cap reforms from October: Previously in December, Ofgem set out three options to make the price cap more robust to high and volatile wholesale energy costs while seeking to maintain the extant benefits of the price cap mechanism for customers.

The Numbers Of Those Affected

The price cap mechanism is thought to protect around 22 million households on default or variable rates on credit meters. The new £1,971 yearly cap is based on a household with typical consumption on a dual electricity and gas bill, paying by direct debit.

Customers that pay by standard credit will pay a further £130 based on the higher cost incurred by energy companies to serve them. The 22 million households protected by the price cap also includes an estimated 4.5 million customers on prepayment meters. These customers are set to pay an additional £47 compared to direct debit customers, again reflecting the higher cost incurred by energy companies to supply them.

All values mentioned in this article already include VAT and are expressed for the current Typical Domestic Consumption Values (TDCV) of 2,900 kWh of electricity, 12,000 kWh of gas, and 4,200 kWh of electricity for Economy 7.

The price cap mechanism is a cap on a unit of gas or electricity with standing charges also considered. It is not, as often confused, a cap on customers’ overall energy bills – which will still rise or fall in line with energy consumption.

Energy Solutions by us, for you

At a time of great uncertainty in global energy markets, it is easy to feel lost in it all.

Keeping up to date with developing situations and the associated ramifications is a tricky and time-consuming job. It is also one that is not likely a priority for you and your business.

So, what do you do?

You partner with energy procurement experts to take the load off of your desk.

Energy Solutions have been trusted brokers for countless businesses for over twenty years, which means we know how to navigate the energy markets during a time of uncertainty.

Website: https://www.energybrokers.co.uk/

Email: nick@energybrokers.co.uk

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