Ofgem Hikes Energy Price Cap raising Energy Bills to pre-pandemic levels

Why the hike?

Last year the energy market was hit by the Covid-19 pandemic. National lockdowns sent wholesale energy prices tumbling to record lows and prompted Ofgem to slash the price cap by £84 to its lowest ever level in October.

As the first national lockdown ended and as businesses and industry developed new ways of working during the pandemic wholesale energy prices rebounded strongly in the latter half of 2020. So much so that prices have now returned to pre-pandemic levels.

The price cap changes will come into effect from 1 April and will see it increase by £96 to £1,156 for 4 million pre-payment customers.

"Energy bill increases are never welcome, especially as many households are struggling with the impact of the pandemic. We have carefully scrutinised these changes to ensure that customers only pay a fair price for their energy. 

"The price cap offers a safety net against poor pricing practices, saving customers up to £100 a year, but if they want to avoid the increase in April, they should shop around for a cheaper deal. 

"As the UK still faces challenges around COVID-19, during this exceptional time I expect suppliers to set their prices competitively, treat all customers fairly and ensure that any household in financial distress is given access to the support they need. 

"The government and Ofgem have been working with the energy industry and consumer groups to support customers through this difficult time, and I urge anyone worried about paying their energy bills to contact their supplier and access the help available," said Jonathan Brearly, chief executive at Ofgem. 

Also read: Ofgem to adjust default tariff price cap by £23.69 to help energy suppliers tackle bad debt

A double whammy for consumers?

The price cap hike has been met with anger by some quarters who claim that hiking energy prices at a time of great financial insecurity for many. As the government winds down several of its Covid-19 support schemes, it is being seen as a 'double whammy' for consumers.

Peter Earl, head of energy at price comparison website Comparethemarket.com, said: "Raising energy costs for millions of households by an average of £96 is an extraordinary move in the current environment. It calls into question the whole point of a price cap which was designed to protect the most vulnerable households."

Also read: How should Energy Suppliers explain Energy Bill Increases?

What is the energy price cap?

The energy price cap was first introduced in January 2019. It was introduced to limit how much energy suppliers can charge their customers for each electricity unit they use on default and pre-payment meters.

Last October, the price cap was changed to its lowest ever level. Ofgem evaluates and alters the price cap every six months.

Some 11 million households on pricey standard tariffs are covered by the energy price cap, and thanks to this periods price hike will be charged more for a typical dual-fuel tariff.

Opportunity for smaller energy suppliers

Now is the time for smaller energy supplier to attract new customers. Whenever a price cap increase is announced, the larger suppliers typically hike tariffs in line with it. Smaller suppliers, however, are often free to offer much cheaper tariffs to consumers.

With the Covid-19 pandemic impacting the economy and consumers' incomes, many will be looking for the cheapest energy deals. The number of switches is likely to increase, so smaller suppliers' efforts to snap up new customers should increase.

Ofgem urges consumers to shop around for the best deals so its extra incentive for suppliers to promote that they can offer a better value for money.

Many consumers will not switch their energy supplier and could find themselves getting into financial difficulty with this price cap rise. As such, an energy supplier needs to ensure they can support struggling customers.

Under Ofgem rules, energy suppliers must offer emergency credit to pre-payment meter customers and put customers struggling to pay their energy bills onto realistic and affordable debt repayment plans.

Also read: Smaller Energy Suppliers continued to snap up market share in 2020 shows new report

Default tariff price cap rising

The default tariff price cap has also been raised with Ofgem allowing energy suppliers to claim £23 to cover the impacts of rising bad debts among consumers.

The pandemic has impacted many consumers' finances, and as such, the number struggling to pay their energy bills has surged.

The rise aims to ensure energy suppliers can continue to supply energy and safeguard their customers and reduce the number of supplier closures that negatively impact the broader energy market.

Also read: Ofgem to adjust default tariff price cap by £23.69 to help energy suppliers tackle bad debt

Use Dyball's CRM to implement the price cap change

Whenever the price cap is changed, it can cause energy billing issues for energy suppliers.

You can avoid issues with Dyball's CRM as it incorporates an energy billing system allowing scheduled and ad-hoc bill production to your bespoke branded billing template. You can manage customer energy billing by exception, with bill runs automated through the system, and errors and exceptions quarantined to be resolved by your billing team.

The energy billing software we provide effortlessly integrates with our chosen ledger and direct debit partners. Additionally, our energy billing solutions can include bespoke integrations with your chosen Direct Debit and Sales Ledger provider.

CRM energy billing solutions will help automate your billing and collection processes.

Further Reading

Smart Meter rollout hits 10 million milestone

Add your Customers to the Priority Service Register with Dyball's CRM

65% of customers on prepay meters concerned over rising energy costs

Dyball Associates are proud to help new supply businesses successfully launch in the UK market.

Through our energy market consultancy services, and the software we've developed, we're supporting new UK electricity and gas suppliers get set up and start supplying.

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