Ofgem lowers price cap: Big Six energy feels the heat
Ofgem just announced that the Energy price cap that was put in place at the start of 2019 will decrease when compared to the previous period. Most news outlets are quoting a reduction of around £75 based on current UK household average energy figures for electricity and gas. This means that the maximum amount that eligible customers will pay would go down from £1,254 to £1,179. Those figures are for customers with consumption that is exactly the same as the national household average.
Does everyone get £75 off their energy bill?
According to the Guardian, the decrease is a little lower than what was anticipated by industry analysts. While around 11 million households could potentially benefit from a reduction in the underlying unit rates or standing charges, it doesn’t automatically guarantee a lower bill at the end of the day.
The reduction will only take place for energy customers who are:
- on a poor value* standard tariff.
- on a standard or smart meter (not prepayment).
- with an expensive supplier pushing their prices right up to the previous limit.
- using the same or a lesser amount of energy than when the previous price cap was in effect.
*variable tariffs that Ofgem deems to be significantly overpriced.
The key takeaway is that the Ofgem energy price cap does not limit the total maximum amount your bill can be. That’s still very much based on how many units of gas and electricity you use in addition to the daily standing charge (a set delivery fee). None of that is changing. The sky is still the limit when it comes to your bill.
So the short answer is no, you will not see exactly £75 off your energy bills. For starters, if you are in the unfortunate position of being a prepayment energy customer, your tariff is subject to an entirely different scheme called the pre-payment meter cap which, by Ofgem estimates, is only supposed to decrease by about £25 instead, according to the very same calculations.
It’s worth noting that energy households on prepayment meters are already paying hand over fist for their energy when compared to direct debit households. They are also more likely to be enduring fuel poverty, commonly defined as when more than 10% of household income goes exclusively towards energy bills.
Take note: if you’re on a fixed rate tariff, where unit rates and standing charges are constant for a set time, no energy price cap for you either. If you chose to do your bit for the environment and picked a renewable energy tariff, it’s likely you won’t benefit from it either.
However, it’s not all doom and gloom, the energy price cap decrease broadly points to a wider industry trend with lower than expected wholesale energy prices. This hopefully means that gas and electricity unit rates will not jump up as much as they did last summer.
The fact is that most households can easily save several hundred pounds below the Ofgem energy cap by switching to a more affordable provider with very little hassle.
What do energy companies make of this?
A couple of large energy companies from the Big Six group, the defacto UK energy cartel, have spoken up about the energy price cap forcing their hand.
“rife with unintended and undesirable consequences [...] wider price interventions are unhelpful”
It’s worth noting that SSE also issued a profit warning, showing a sharp decline in its retail energy division. At the same time, British Gas and its parent company, Centrica, have slashed jobs and dividends and are also blaming the price cap for their current financial quagmire.
While the truth may be a little hard to swallow for these big energy names, they keep trying to point the finger at Ofgem and government regulation. They can do that all they want but, at the end of the day, they have been digging their own grave for quite some time now.
These companies started off with an unprecedented monopoly thanks to successive deregulation policies. Yet their market share has slowly eroded by over 20% in the past few years, as more people switch to smaller suppliers. In spite of this, they still retain around 70% of the UK residential energy market.
Several of the Big Six companies now moaning about Ofgem spoiling their fun, also control utility-scale power plants, meaning that they are seeing revenue at both ends of the market, energy generation and energy supply, and could leverage these economies of scale and market verticality.
On the retail end, instead of incentivising customers through loyalty schemes, good customer service or complimentary home energy perks as a growth strategy, they have instead banked on customer confusion and despair as a way to make money.
There is an ever-increasing number of smaller British-owned energy companies who are able to deliver better customer service and greener energy without Big Six pricing duplicity or hassle.
We should all ask ourselves this. Why pay more for the exact same gas and electricity your neighbour gets for a few hundred quid less?