Ofgem: Further reduction but ‘winter will be tough’

‘MANY FAMILIES WILL STILL STRUGGLE’

Energy regulator Ofgem has today (Friday, 25 August, 2023) announced a further reduction in the energy price cap for the last quarter of 2023 (Oct to Dec).     

The change will bring the average dual-fuel energy bill below £2,000 a year for the first time since April 2022, saving households an average of £151 on the previous quarter.   

From 1 October – 31 December, the cap will be set at an annual level of £1,923 for a dual fuel household paying by direct debit based on the current typical domestic consumption values (TDCV) rate. 

	Direct Debit	Prepayment	Standard Credit	Economy 7 (electricity only Direct Debit)
July – Sept 2023 cap	£2,074	£2,077	£2,211	£1,400
Oct – Dec 2023 cap	£1,923	£1,949	£2,052	£1,298

The drop, the lowest level since October 2021, reflects further falls in wholesale energy prices, as the market stabilises and suppliers return to a healthier financial position after four years of loss making.   

Ofgem is clear that it expects all suppliers to continue improving customer service, to support their most vulnerable customers and to shore up their financial resilience to prevent the kind of failures we saw two years ago. Ofgem recognises that there is some excellent best practice across the sector but expects this to be the norm with poor practice stamped out. 

Alongside changes to the price cap, Ofgem has also introduced measures to reduce costs for prepayment meter customers and ensure extra support for those facing disconnection from the network.   

The price cap savings – which can be passed on more quickly to customers thanks to the price cap updating quarterly – continues the downward trend since prices peaked at £4,279. However, it remains well above the average before the energy crisis took hold in 2021 and the market remains volatile.   

Jonathan Brearley, Ofgem CEO, said: “It is welcome news that the price cap continues to fall, however, we know people are struggling with the wider cost of living challenges and I can’t offer any certainty that things will ease this winter. 

“That’s why we’ve introduced new measures to support consumers including reducing costs for those on pre-payment meters, and introducing a PPM code of conduct that all suppliers need to meet before they restart installation of any mandatory PPMs.   

“There are signs that the financial outlook for suppliers is stabilising and reasonable profits are returning. With the small additional allowance we’ve made to Earnings Before Interest and Tax (EBIT), this means there should be no excuses for suppliers not to be doing all they can to support their customers this winter, and to reinforce this we’ll be introducing a consumer code of conduct which we will look to have in place by winter.

“This code will ensure there are clear expectations of supplier behaviours especially for their most vulnerable consumers with whom suppliers should be reaching out proactively, with compassion and understanding. There are great examples of suppliers already doing this but I want to see this become the norm in such an essential sector that has such a big impact on people’s lives.” 

Ofgem understands that while suppliers cannot control wholesale prices or fix the wider cost of living pressures hitting their customers, now the market has stabilised, they must continue improving customer service and ensure that support across the board is accessible, responsive and understanding, including giving time to make pay arrangements and directing customers to further support and advice. They must also invest in strengthening their financial resilience to protect consumers against the cost of supplier failure. 

Additionally, while still low by pre-crisis levels, we are starting to see more and more competitive fixed deals coming onto the market and levels of switching are slowly increasing.

With a lower price cap and reasonable profits starting to return, there is an opportunity for this to continue to grow. Anyone considering fixing should weigh up all the facts and consider what is most important to them, whether that’s the lowest price, or the certainty of knowing exactly what they will pay each month.

It’s important customers are comparing fixed deals with the new, lower price cap announced today. Suppliers are expected to ensure they are transparent in releasing all tariff information to enable consumers to make simple comparisons of the deals available to them across the market.  

While the price cap has protected households from the full extent of volatility and surges in wholesale prices over the last two years, it was originally introduced by the Government to protect the minority of consumers who did not switch rather than to cover the vast majority of consumers, as it does now.

It is a blunt tool and in the current market it has costs and as well as benefit. It’s important to look at alternative models to examine whether they could work better with the current volatile market and the move to net zero. 

 Ofgem has also today published:    

1. A Final Decision to raise the Earnings Before Interest and Tax (EBIT) allowance by £10 per customer per year. Most of this increase is to cover Renewable Obligations ringfencing so that customers’ money is protected in the event of a supplier failure. 
2. Removal of the temporary RO ringfencing allowance, worth £8 per customer and covered by the additional EBIT costs above  
3. A new sliding scale for EBIT meaning if prices surge, the EBIT allowance reduces as a percentage preventing suppliers from making excessive cash gains from a high price market  
4. Final decision on the allowance for additional support credit (ASC) bad debt costs – a new allowance to help ensure some of the most vulnerable consumers remain on supply this winter  
5. Implementation of UNC840 in the cap, reducing the PPM premium  
6. Price Cap model technical changes Final Decision  
7. Levelisation Policy Consultation  

By raising the EBIT allowance, Ofgem is taking the next step in its drive to make the retail energy sector more resilient, as we move into another difficult winter when price volatility remains a risk.  

At the height of the energy crisis around 30 suppliers failed because they did not have enough capital in the reserve to stay in business – and the cost was shared among all energy consumers, adding £83 to bills.  

With suppliers only now starting to recoup a portion of their multi-billion pound losses over the past four years, a small increase in permitted profit margins will allow companies to better cover their costs, attract investment and retain financial stability protecting consumers into the future.  

Raising the EBIT allowance from its current rate of 1.9% to 2.4% from 1 October will involve an average £10 increase in bills per year. £8 of this will cover costs to consumers incurred by an additional requirement of suppliers to ringfence enough funds to cover their Renewable Obligations, protecting consumers from additional costs should a supplier go bust.    

The EBIT rate, which is well within international norms for energy retail profits and lower than most other business sectors in Britain, will also be altered from a ‘flat rate’ to a more flexible model that tracks the price cap level and tapers as low as 1.75% in the event of another price surge in the wholesale market. This would prevent suppliers from making excessive cash profits in a high-cost market. 

Strengthening the commitment to supporting struggling and vulnerable consumers, Ofgem is also reducing the cap for prepayment meter (PPM) customers by £51 per year through an updated approach to calculating the costs of unidentified gas, approved in April this year.  

Using some of the benefit from this change, the regulator is now able to introduce an initial 12-month allowance to cover increased debt costs associated with Additional Support Credit that is offered to PPM customers, often at the point of disconnection. This new allowance will help ensure some of the most vulnerable consumers remain on supply this winter.   

Longer term, Ofgem seeks to permanently end the PPM premium, where prepayment customers are charged more than those who pay by direct debit to cover the additional costs and resources required by suppliers to provide energy via PPM. A consultation is underway with an aim to ‘levelise’ these standing charges by April 2024 to coincide with the end of government support currently in place via the Energy Price Guarantee.  

Morgan Vine, Head of Policy and Influencing at Independent Age said: “Today’s Price Cap announcement offers little comfort to older people living on a low income and struggling to get by.

“Our helpline is continuing to hear from people in later life in financial hardship who have been forced to make sacrifices to pay their bills, including eating one meal a day, washing themselves in freezing cold water, and risking falls by not turning on the lights at night.  

“Gas unit costs are still well over double what they were in winter 2020/21 and electricity unit costs are up by over half. The fixed incomes of older people in financial hardship simply cannot keep up with these increases. Long term solutions to protect the most financially vulnerable from high energy prices are desperately needed. 

“We’re calling on the government to introduce an energy bills social tariff for those in greatest needed, including people over 65 on a low income and those who have high energy consumption due to illness.

“This long term and sustainable solution would offer some protection to people in later life living on low incomes, so they aren’t forced to make dangerous choices now, and as we approach the winter. “

The next quarterly price cap announcement will be in November 2023, covering January – March 2024.