Will Covid-19 pandemic lead to an energy price cap rise next year? Ofgem opens consultation

What is the energy price cap?

The energy price cap was introduced by Ofgem to limit how much energy supply companies can charge their customers for every unit of electricity and gas on default tariffs and pre-payment meters. Its main function is to protect the consumer from being overcharged by energy suppliers.

Currently, the default tariff price cap stands at £1,126 per year but is set to fall to £1,042 in October.

Rising Energy Bills

A rise to the energy price cap will see energy bills for the UK’s 11 million consumers increase but will be welcome news to energy suppliers concerned over growing numbers of customers defaulting on their energy bills.

With the UK economy suffering record losses and with the government furlough scheme due to end, some energy suppliers are worried that a rising number of customers unable to pay their energy bills will hit their already shaky finances.

Read more: Energy Bills: Helping your customers understand their energy bills

Increasing defaults on energy bills

Unemployment has already risen to over 4% and is forecast to rise steeply over the coming months as businesses seek to cut costs and stave off insolvency following a traumatic year for many.

The announcement by Ofgem that it was opening a consultation on the default tariff cap shows that the regulator is concerned that many energy suppliers will struggle over the next year and could even be forced out of the market.

Plans to raise the price cap come just weeks after Ofgem announced that the price cap would be cut to a record low this October.

The new cap on prices comes into force on 1 October and will see a cut of £84 for standard variable tariff customers to £1,042 a year and by £95 for prepayment customers to £1,069. 

The announcement caused some energy suppliers to complain that the cuts would hit their finances at a time of heightened uncertainty. 

Price cap changes

In its consultation notification, Ofgem suggests that it might allow energy suppliers to increase prices of their default variable energy tariffs at a higher than usual rate to assist them in facing the challenges posed from customers defaulting on their energy bills and reduce the impacts of high customer debt.

Read more: Covid19: Energy Supplier concerns over bad debt grows ahead of furlough scheme end

“Suppliers recover the costs of people not paying their bills from people that are paying their bills. In that sense, the costs are always socialised across customers did not cause the problem. In addition, customers may have cancelled direct debits and transferred to standard credit. We, therefore, propose to recover any adjustment for debt-related costs from all default credit customers,” said Ofgem.

Impacts of Covid-19

The Covid-19 pandemic has created a wave of uncertainty in the energy market and the global economy as a whole.

To help energy suppliers ride out the impacts of the pandemic, Ofgem delivered a support scheme worth £350 million to help struggling suppliers.

“We set the level of the cap to reflect the cost to suppliers of supplying this energy. However, the Covid-19 pandemic has potentially changed these costs in a way that wouldn’t be accounted for in the existing cap methodology,” Ofgem added.

Read more: Ofgem announces £350 million support scheme to help struggling energy suppliers

Rising Wholesale Energy prices

Another factor that plays a role in deciding whether the price cap should be raised or lowered is wholesale energy prices.

At the height of the pandemic, wholesale prices crashed as demand from the global economy tanked due to many nations introducing lockdowns to contain the spread of the virus.

With economies beginning to open up again, wholesale prices are back on the rise.

As a consequence, some energy suppliers have raised the cost of some tariffs. Bulb energy, for example, has increased energy bills by £53 per year citing rising wholesale costs for the cause. Other energy suppliers are likely to follow.

The consultation is open to responses until October 12^th with a final decision on the price cap being announced in December.

Further Reading

Citizens Advice sides with Ofgem in network investment row

Majority of Energy Suppliers failing to refund credit to customers within 10 days

Green Energy Tariffs rise in importance for consumers, cost of energy bills remains top concern

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