Ofgem price cap – what does it mean for suppliers

Ofgem, the UK’s gas and electricity watchdog, has announced the details of a price cap on the amount charged by energy suppliers. Due to come into force in January 2019, the cap is estimated to save around £76 a year for more than 11 million households.

Under the new rules, the maximum amount billed to a customer using average amounts of energy and paying by direct debit would be £1,136 per year. This is equal to the cap provided by the Safeguard Tariff for vulnerable customers.

However, that doesn’t mean that bills will never exceed this amount. The actual amount billed will still depend on the energy consumed, so high energy users could still see annual costs much higher than this.

How much will the price cap affect tariffs?

Customers who are on fixed term deals are unlikely to see any changes as a result of the cap. Generally, these will be well below the cap level, so the only tariffs which will be affected will be the default or Standard Variable Tariff (SVT)

By capping the amount charged by suppliers, Ofgem hope to reduce the bills of approximately 11 million households who are currently on SVTs. They hope that this will make the energy marketplace a ‘fairer’ place to be, tackling the £1.4bn a year consumers have been judged to be overpaying the Big Six.

The amount saved by any individual household will depend on how much energy they use, as well as other factors such as the house they live in and their geographical area. For the sake of comparison, the savings over a suppliers Standard Variable Tariff (SVT) could be:

Of course, it’s not just the Big Six who will need to cut their tariffs to remain below the cap. Some smaller suppliers also have SVTs that fall above the level set by Ofgem and will need to trim back their rates in order to stay compliant.

How will the cap affect energy firms

Overall, the cap is going to be bad news for the larger energy suppliers, as they will no longer be able to make profit from those customers unwilling to switch or renegotiate at the end of a contract. Some are predicting big losses next year, whereas others are taking a more proactive approach in cutting costs ahead of the price cap being implemented.

As a prediction, we expect some of the knock on effects of the cap to include:

• Job losses : E.On have already planned to cut around 500 UK jobs ahead of the cap, and have said they are aiming for savings of around £100m to balance out the losses imposed by the cap. Other firms will undoubtedly follow suit.
  
• Lower profits : Companies who have not done enough to prepare for the cap could see a slump in profits over the next 12 months as they readjust their operations to cope with a reduced income.
  
• Higher tariffs : It seems bizarre that a measure designed to reduce bills could have the opposite effect, but it’s a possibility. The reduction in income from SVTs could mean suppliers are forced to make their fixed term deals more expensive.
  
• Reduced switching : Although consumers will still be urged to shop around, a consequence of the cap could be that they feel less urgency to make a switch. At the time of writing, the cheapest dual fuel fixed term deal comes in at £921 per year; that’s more than £200 less than the capped energy price would be. However, unless consumers have the impetus to look for them, they may stick it out with a larger supplier rather than moving to a cheaper alternative as they believe the cap is protecting them. Ofgem has predicted that the number of people switching could fall by up to a third.