Will The New, Lower Energy Price Cap Lead To More Switching?

Will The New, Lower Energy Price Cap Lead To More Switching?

Ofgem’s energy price cap is at its lowest in 18 months. Can consumers take advantage by switching suppliers at this time?

The last 12 months in the energy industry have been volatile for everybody – suppliers, consumers, regulators and the government. Wholesale prices hit record highs, as did consumers’ energy bills. Of course, bills would’ve been even higher if not for the government’s Energy Price Guarantee (EPG), costing the taxpayer tens of billions of pounds. 

The EPG is now discontinued, so prices will now be set by your supplier in accordance with Ofgem’s energy price cap. The price cap was altered in August and is now at its lowest rate in 18 months. This is good news for consumers, but it’s also good news for suppliers, who now have a bit more headroom to offer incentives to win new customers. 

In this article, we’ll examine the new price cap and whether it can encourage switchers and reinvigorate competition in the sector. We’ll also look briefly at a new takeover deal, capping off a hectic month in the energy industry. Let’s get started.

Changes to the price cap

Under the new price cap, announced by Ofgem on August 25th, the average household will now pay £1925 per year for their energy. This is 7% below the previous cap, which Ofgem set at £2074, which in turn was lower than the cap before, which was £2500. The new cap is, therefore, at its lowest rate since March 2022 and will be effective from October 1st. 

Of course, energy prices coming down is welcome news after the upheaval of the crisis months, but we have to remember that it’s all relative. Energy bills are still extremely high. Households and businesses are still paying much more than they were a few years ago. There’s also no guarantee that prices won’t rise again in the future.

Time to switch?

As news of a lower price cap emerges, some savvy consumers are taking advantage of incentives from other suppliers and switching their energy accounts. In July 2023, 213,000 customers changed suppliers, representing a 24% increase from the previous month and an 85% increase since July 2022. 

While this figure is still relatively low – before the energy crisis, you’d often get months where 400,000+ customers might switch – it’s still good to see some much-needed competition in the industry. The data shows:

  • 58% of switchers were between larger suppliers
  • 22% were from large to small or medium-sized suppliers
  • 14% were from small to large suppliers
  • 5% were between small and mid-tier suppliers

Switching has increased before – but for the first time – the price cap fell below the government’s Energy Price Guarantee, encouraging some suppliers to offer fixed-price deals below the current cap level. While many suppliers criticise the price cap for not giving them enough headroom to offer deals, they can still market year-long fixed deals now, assuming that the cap will still be lower in six months. In any case, the government has no plans to remove the price cap. It would be politically dangerous.

However, the influential energy intelligence company Cornwall Insight sounds a word of warning to consumers. It believes the market is still volatile and that the price cap is unlikely to remain below £2,000 next time around. 

Octopus acquires Shell Energy

Octopus Energy is set to purchase Shell’s household energy business in the UK and Germany. While the deal is not completed yet (it’s expected to complete by the end of the year, pending regulatory approval), it represents a significant shift in the UK energy marketplace. The sale is part of Shell’s strategic plan to exit household energy operations in the UK, Germany and the Netherlands.

Octopus is currently the third biggest energy company in the UK in terms of customer numbers. Last year, it acquired Bulb Energy, instantly moving from fifth to third in the rankings. When the Shell purchase goes through, Octopus will be the second largest player in the industry, with 6.5 million customers. It now only lags behind British Gas, which has 10 million customers. 

This is a significant development in the UK energy industry because while Octopus is part of the Big Six energy suppliers, Shell is not. Therefore, the deal strengthens the Big Six’s stranglehold on the UK energy marketplace. Once the Shell deal is complete, 90% of the nation’s energy customers will be with a Big Six supplier.

A busy month

As you can see, August 2023 has been a busy month in the UK energy industry. While we welcome the lower energy price cap, we recognise that the sector is still volatile and is not out of the woods yet. Customers should be wary of signing up for deals that could see them losing out in the future.

It’s also interesting to see how dominant the Big Six has become in the energy marketplace. The current Big Six is bigger than ever, even compared to the old Big Six of ten years ago. Of course, the reason for this growth is that the energy crisis led to the collapse of more than 25 smaller suppliers, and the Big Six were happy to bring their customers on board. However, if just six companies hold 90% of the customer base, it could lead to a real lack of competition. No one wants to see consumers lose out.

In the meantime, we’ll wait and see what happens next month.

Leave a Reply

Your email address will not be published.