The price cap is falling, but will customers see lower bills

The price cap is falling, but will customers see lower bills

After the chaos of the last two years, the energy sector in the UK may finally be returning to something like normality. Ofgem is lowering the price cap again, potentially saving consumers significant sums. However, it’s not all good news. In fact, many observers believe that consumers are not seeing enough of a reduction in what they pay. Are suppliers using this as an opportunity to make gains after tough times?

In this article, we’ll look at the new price cap in more detail and whether it is indeed good news for the consumer. Let’s get started.

The price cap falls again

Ofgem has announced that its energy price cap will fall by 12% (quarter on quarter) for the three months from April to June. This reduction will set the average household’s annual dual fuel bill at £1690, a reduction of £238 over a year, or around £20 per month. The cap is now at its lowest since Russia’s invasion of Ukraine in 2022, which caused energy prices to spike.

Bad debts

However, at the same time, Ofgem reported how hard the last two years have been for energy consumers. Energy debt is now at a record high of £3.1 billion. 

To help suppliers claw back this debt while protecting consumers in the marketplace, Ofgem announced a raft of new measures, including:

  • Recalculating standing charges so energy suppliers cannot charge prepayment customers more than direct debit customers
  • Extending the ban on acquisition tariffs (where suppliers offer lower rates for the first year to tempt new customers on board) by 12 months
  • Ending the Market Stabilisation Charge, where energy companies were required to compensate the previous supplier when they take on a new customer
  • Maintaining wholesale energy cost allowances

Acquisition-only tariffs

Acquisition-only tariffs are a controversial topic in the energy industry. Larger suppliers (who can afford to take a hit on their revenues) like them because they’re an effective tool for winning new business. It’s also good for savvy consumers who know how to get the best deals. 

However, many see them as a bad thing. Smaller energy suppliers see them as a way they can be squeezed out of the market by larger players, while many consumers who don’t (or can’t) switch regularly pay the price in higher energy prices.

By extending the ban on acquisition-only tariffs by a year, rather than banning them permanently, the energy regulator has maintained the status quo. But, they are considering lowering that extension to just six months.

Smaller energy companies now fear a return to a Wild West ‘tease and squeeze’ energy marketplace, where customers are confused and smaller suppliers risk insolvency.

Lack of competition

Meanwhile, research by KPMG has shown that customers are disillusioned with the energy marketplace, and many blame the price cap, a measure that is supposed to protect them.

The survey of 1,700 energy customers found that:

  • 48% of respondents believe the cap has led to fewer options for better deals
  • Only 35% believe the price cap has positively impacted energy prices
  • Just 25% of consumers have shopped around for a new supplier in the last year

While there’s no rule against suppliers pricing their tariffs much lower than the price cap, having a cap in place seems to encourage suppliers to price their tariffs too closely to it, so there are no opportunities for customers to make savings by switching.

The price cap was only supposed to be temporary, but it has now been in place for five years. Experts believe a new approach may be needed to encourage competition while protecting consumers, perhaps involving incentives for investment and innovation.

Encouraging competition

Competition is vital to lowering prices, but how can the regulator stimulate healthy competition if the price cap discourages any supplier from taking a risk with a lower tariff, and acquisition-only incentives are banned (albeit temporarily)?

Ofgem believes removing the Market Stabilisation Charge may help bring the market to life. This charge, which required energy companies to pay compensation to previous suppliers when they win a new customer, was supposed to help keep suppliers in business when many were going bust. However, as the market has now stabilised, there is little need for this charge anymore. 

Looking to the future

While it’s good to see energy prices dropping, more must be done to help consumers reap the benefits of lower energy prices. In a marketplace, competition is supposed to lead to lower prices, but the price cap stifles competitive pricing. 

On the other hand, flinging open the doors to unfettered competitive pricing is a considerable risk for the industry. Consumers who aren’t savvy enough to monitor their energy tariff on an ongoing basis will only suffer from ‘tease and squeeze’ deals. Moving forward, it would be best if the industry could come together to create a transparent approach that benefits everybody.

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