Cost of living: will fall in energy price cap make a difference?

Energy bills for a typical household will fall to £2,074 per year from July under Ofgem’s new price cap – the first time the cost of energy will have dropped in two years.

The price per unit of gas and electricity had been pegged by the government’s Energy Price Guarantee (EPG), which put a ceiling of £2,500 on the typical bill. As a result of the Ofgem price cap now falling below £2,500, the EPG will no longer operate after 1 July.

So 27 million households in England, Scotland and Wales now face a modest decrease of around £400 in their annual energy bills, depending on their usage. But questions have been asked as to what the latest announcement by Ofgem will mean for them and whether it will translate into real-terms savings for consumers.

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What is the energy price cap?

“The energy price cap dictates the maximum rates energy firms can charge for people on their standard tariffs in England, Scotland and Wales,” explained Martin Lewis, founder of MoneySavingExpert. And this is relevant to “almost every household” in the country.

It was introduced by Theresa May’s government in January 2019 to “prevent energy firms from overcharging customers”, said the Daily Mirror.

Ofgem, the regulator, now reviews the price cap once every three months, having previously done so twice a year. The cap “only affects variable tariffs”, said consumer news site Which?, but “most households are currently paying variable rates for their energy”. This is because competitive deals “all but vanished from the market” in 2021, drastically reducing the choice available to customers.

Why has the energy price cap gone down?

A rise in gas prices “driven primarily by Russia’s squeeze on supplies to Europe”, said the Financial Times in August 2022, is seen as the reason behind higher household bills in the last year.

The Guardian cited research suggesting that Russia’s invasion of Ukraine has “cost the equivalent of £1,000 for every adult” as the UK grappled with its “over-reliance on gas”.

But “Vladimir Putin’s attempt to ‘weaponise’ Russia’s gas supplies has failed”, added The Telegraph, as “European gas prices continue to tumble” from the highs of 2022.

The newspaper suggested a “relatively mild winter” has assisted in the lowering of prices due to “weaker demand”, with efforts from across the European Union to “reduce energy usage, boost gas storage levels and import more liquefied natural gas from abroad”.

Will the change make a difference for families?

This week’s change means households will “pay around 17% less than they are currently paying under the EPG”, MoneyWeek reported, and consequently they can expect to “spend around £500 less courtesy of the new cap”.

The government brought in the EPG in October 2022 after the Ofgem price cap “soared beyond £3,500”, said Forbes. While this guarantee held prices at a maximum of £2,500, it “will be superseded by the new cap”, the news site explained.

However, The Guardian warned that households will feel “little relief” as “government top-ups worth £400 between October to March have come to an end”. These payouts formed part of the government’s Energy Bill Support Scheme.

“Even after July, most people will still be paying much more than they were before the energy crisis hit,” said Channel 4’s Paul McNamara. “Energy charities say without help 6.6 million households will still be in fuel poverty after the price drop.”

What are the projections for the future?

Analysis from consultancy Cornwall Insight predicts a “further drop in October, when it expects the typical annual bill to be £1,976”, the BBC reported.

This is likely to provide further financial relief to worried families, many of whom are “struggling to make ends meet”, the i news site added, as “sky-high bills” persist.

However, Ofgem CEO Jonathan Brearley warned that prices are “unlikely” to return to levels seen before the energy crisis, at least “in the medium term”. The Telegraph cited the Energy and Climate Intelligence Unit (ECIU), which suggested prices “might not get below £1,700 a year for the rest of this decade”.

While future government support is not guaranteed, Chancellor Jeremy Hunt suggested he may be willing to intervene to help with unexpected price rises.

“I don’t want to predict what might happen to energy prices,” he told Sky News. “All I can say is I think I have demonstrated in the autumn statement and the spring budget that we are willing to do what it takes.”