Ofgem slashes energy price cap - here's what it means for your bills
The cap may be set to drop - but energy prices are still double what they were less than two years ago, ITV News Consumer Editor Chris Choi reports
Words by Daniel Boal, ITV News Multimedia Producer
Ofgem has announced a drop to its energy price cap from the current £3,280 per year to £2,074 for the average household in England, Wales and Scotland.The change, which will take effect from July 1, is due to falling wholesale energy prices.
The lower cap will replace the Government’s Energy Price Guarantee (EPG), which currently limits the typical household energy bill to around £2,500, meaning the typical annual bill will fall by around £426.
But experts are warning consumers are likely to feel little benefit to their household finances.
Campaigners have warned the lower cap won't provide much relief to households that struggled to pay their bills over the winter, because the government’s energy support schemes, such as monthly discounts, have come to an end.
'From July, for every £100 you currently pay on your energy you will pay £83', said Martin Lewis
Energy Security Secretary Grant Shapps described the news as “positive” on Thursday morning, saying the drop is 'a major milestone in efforts to halve inflation.'
However, Ofgem boss Jonathan Brearley acknowledged many families will continue to struggle as bills remain high.
Jonathan Brearley, speaking on ITV's Good Morning Britain said: "We have seen a massive shock to our market. We saw Russia withdraw a huge amount of gas from the market and that drove prices up last year. Now, things are recovering, but as ever it is hard to predict what might happen in the future.
"So prices are drifting down and the market is stabilising, we're hopeful that we will see fixed prices enter the market in the second half of this year. But predicting when prices will fall back to where they were is extremely difficult and I think that will take time.
Utilita Energy CEO Bill Bullen told Consumer Editor Chris Choi 'low income households in particular are going to need extra help' even with the price cut
Mr Bullen added: "The scale of the problem is only something that the government can address.
"The government was quite generous last time round with all the money that they put towards energy bills, but it wasn't focused enough.
"Lots of frankly wealthier people received a subsidy that they just didn't need. It would be much better if they focused a similar amount of money a smaller number of customers that really need that help."
The price cap rocketed from £1,162 a year for a typical household in August 2021 to its current level of £3,280, after briefly reaching £4,279.
Analysts said the pandemic and Russia’s war in Ukraine had both pushing up wholesale prices.
Customers were partly shielded from the most recent rise by the government’s Energy Price Guarantee, which limits annual energy costs to £2,500 for the average household – which was below Ofgem’s price cap.
This will change in July when the price cap falls and the threshold for the guarantee rises to £3,000.
Will energy bills drop this summer?
Consumers will pay less for their energy overall annually. But the amount that the price cap rate drops by won't necessarily make bills feel cheaper.
That's because government's support schemes have come to an end, meaning some people's monthly payments may be higher than in winter when the discount was in place.
The surge in bills as the monthly discount came to an end prompted last month to be dubbed 'awful April' as households watched many bills rise with the dawn of the new financial year.
Households are being warned not to view the energy price cap as an absolute limit on their bills annually.
The cap does not set the maximum a household will pay for their energy but limits the amount providers can charge them per unit of gas or electricity, so those who use more energy will pay more than the annual cap.
Will standing charges drop?
The standing charge – the roughly £300 paid each year by households just to access gas and electricity, is unlikely to fall.
Consumer advice expert Martin Lewis wrote on MoneySavingExpert: "In my view, this leaves a moral hazard that the less you use, the less you save. I have lobbied Ofgem hard on this, sadly to little avail."
Will the government continue to provide support?
In July, the government will no longer be subsidising energy bills via the guarantee.
Only those in receipt of means-tested benefits, pensioners and those with disabilities are currently set to receive further help with their energy bills, amounting to £900, £300 and £150 respectively.
Fuel poverty charity National Energy Action chief executive Adam Scorer said: “Coming out of winter, most people will welcome any respite from record high prices, but it still leaves prices more than 80% higher than the start of the energy crisis and two million more households trapped in fuel poverty.
“More than two and a half million low income and vulnerable households are no longer receiving any Government support for unaffordable bills. For them, the energy crisis is far from over.”
Liberal Democrat Leader Ed Davey added: "This will offer cold comfort to millions of families struggling with soaring food prices and housing costs.
"The Conservative government could have chosen to cut energy bills months ago funded through a proper windfall tax.
"Instead Rishi Sunak put bills up while families suffer. It shows he doesn't get it or just doesn't care."
Will we see a return of fixed-rate deals?
Fixed-rate contracts had provided choice for households who wanted to lock in deals, but energy firms stopped selling new fixes as energy prices began to soar in 2021.
However, due to short-term price certainty, energy firms may start reintroducing them.
Fixes can help protect consumers from future price fluctuations, prompting some to lock in a fixed deal before predicted price rises.But they can also be a gamble as if prices were instead to fall further, consumers can find yourself locked in at a higher rate.
Many households will be braced to see whether the price cap drop could signal a return of fixed rate offers.
Martin Lewis writing on MoneySavingExpert on Wednesday said: "Based on current predictions, if any firm offers a fix for not much more than the July price cap, for the sake of certainty it's worth considering."
Will bills continue to fall?
Consultancy firm Cornwall Insight predicts that July’s fall will be followed by a further drop in October, when it expects the typical annual bill to fall to £1,976.
But it also forecasts the typical bill will rise again in January to £2,045.
It does not expect energy prices to return to pre-Covid levels before the end of the decade at the earliest.
And it warned that prices remain subject to wholesale market volatility, with the UK’s reliance on energy imports meaning that geopolitical incidents could continue to have a significant impact.
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