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15 million UK households set to benefit from energy price cap cut

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UK households are set to benefit from reductions on their energy bills following regulator Ofgem’s decision to reduce the price cap to the lowest level since the system was introduced in January last year.

The cap on the most widely used tariffs are set to lower by about 7.5 per cent from 1 October this year, on average falling by £84 from £1,126 to £1,042 per year for the winter period.

A cap on electricity and gas bills came into effect in January 2019 and was a flagship policy of former Prime Minister Theresa May to end what she called “rip-off” prices.

The changes mean that around 11 million households on default tariffs and 4 million on prepayment meters (around half the population in total) will savings on their energy bills this winter. The reduction is particularly welcome for households suffering from economic hardship as a result of the coronavirus pandemic.

The decision to lower the cap was made due to a sharp decrease in wholesale gas prices following depressed energy demand, which saw it hit 20-year price lows over the spring.

Wholesale gas prices have started to recover since then, and if they continue to rise over the coming months, the cap is likely to rise in April to reflect these higher costs.

Ofgem adjusts the level of the cap twice a year to reflect the estimated costs of supplying electricity and gas to homes for the next six-month period.

Suppliers are not allowed to charge above the cap but they can offer cheaper deals for savvy customers.

“Millions of households, many of whom face financial hardship due to the Covid-19 crisis, will see big savings on their energy bills this winter when the level of the cap is reduced,” said Ofgem chief executive Jonathan Brearley.

“They can also reduce their energy bills further by shopping around for a better deal. Ofgem will continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy market.”

Ofgem also recommended that the price cap is not lifted at the end of this year and that it should remain in place in 2021 for these households on default tariffs and prepayment meters.

According to the price cap legislation, the price cap can be lifted from 2020 (and no later than 2023) if “the conditions for effective competition” in the domestic retail energy market are in place which would prevent a return to customers on default deals being overcharged for their energy.

From 2020, Ofgem is required to give an annual independent assessment on whether these conditions are in place. The decision on whether to lift the cap rests with the BEIS Secretary of State.

Emma Pinchbeck, chief executive of supplier trade body Energy UK, said: “Today’s announcement reflects another significant fall in wholesale costs since Ofgem set the current price cap. Most of the average bill is made up of costs outside suppliers’ direct control and buying energy accounts for the biggest share of these.

“Lower wholesale prices are only part of the story – because of Covid-19 energy suppliers are facing likely increases in debt and other rising system costs, in an industry which already operates on small margins.”

In July, Ofgem unveiled a five-year £25bn investment programme designed to help transition the UK’s energy grid to renewables and cut costs for households. 

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