February 2020
When households are still paying more than £3 billion than necessary...
The 'energy price cap' for households with a credit energy meters was introduced in January 2019 (A 'prepayment meter price cap', sometimes known as the 'safeguarding tariff' had already been introduced on April 2017).
The idea was a simple one, first proposed by the Labour government in their 2017 election manifesto and then adopted by the Conservative government under Teresa May.
In recognition of increasing energy costs and as a measure to protect disengaged and vulnerable customers the government and Ofgem agreed to set a limit to the maximum amount energy suppliers could charge for their default 'Standard Variable' tariffs.
Despite this about 11 million customers on standard variable tariffs are still collectively missing out on a combined £3.5 billion of savings by not switching to a better deal.
Households can save an average of about 30%, or more than £300 a year by switching to one of the most competitive dual fuel tariffs (based on average annual usage levels of 3100kwh of Electricity and 12500kwh of Gas)
The gap between the best priced energy tariffs and the prices charged to those on standard variable tariffs has always been substantial and whilst this gap narrowed significantly in January 2019, falling wholesale energy costs and increased supplier competition has since seen it return to pre-price cap levels.
In October 2019, the price cap was set at £1,179 whereas the price of the most competitive energy tariffs available has fallen by an average of £73 with the average of the top 20 cheapest deals being £855.
How is the price cap calculated?
The energy price cap establishes a maximum price that can be charged per unit of energy, and a maximum that can be charged per day as a standing charge. Energy suppliers have freedom to set their tariffs below this level, however all of the 'big six' suppliers have continued to set their standard variable tariffs at this maximum ceiling.
The cap is reviewed every six months and will rise or fall based on the costs that Ofgem calculates suppliers need to spend to get energy to your home. The price cap is next due to be revised on 1 April.
In a recent survey by Compare the Market findings suggest that just 16% of households have heard of the price cap and can explain what it is.
Almost a third (32%) have not even heard of the price cap while more than half (52%) have heard of it but cannot explain what it involves. Just 5% of consumers can say what the current price cap level is.
Compare the Market’s Price Cap Update shows that since the introduction of the current price cap on 1 October 2019, prices in the market have dropped, with the average cheapest available dual fuel tariff falling by £73, from £928 to £855.
Peter Earl, Head of Product (Energy & Utilities), says:
“Our research shows that the price cap has done little to safeguard those people on a standard or variable rate tariff. The more affordable prices available on the market to those that shop around clearly show that the level of the price cap is a rip off. Too few people are switching suppliers, leaving millions of people paying too much for their energy. “Even if the next price cap drops to the lowest level since it was first introduced, people should not see this as a good value price to pay for energy – rather, it is the absolute ceiling of what they should be paying. It is evident from our findings that understanding of the price cap is low. We would encourage anyone on a standard or variable tariff to review their current provider to see if they can find a better deal elsewhere.”
In what is percieved to be a complex market only the minority of households (roughly 20%) actually switch energy supplier each year. Whilst this engaged group are undoubtedly driven at least in part, by sensitivety to energy costs clearly this alone is not sufficient a driver to encourage change and help households reduce bills.
Has the price cap helped?
Consumers on standard variable tariffs are paying roughly £79 a year less than predicted price levels without a cap, however very few are aware of any savings as the overall long term cost trend in price continues upwards.
It is impossible to quantify whether the cap has increased inertia in the market amongst the groups it was designed to help. Overall the level of households on a standard variable tariff has remained relatively stable suggesting consumer behaviour in the market remains unchanged.
The price cap may therefore be providing some relief, however it's impact is low and the same market conditions remain - switching energy supplier and being active in the domestic energy market is the only way to ensure consumers can access competitive energy prices.
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