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Ofgem Drops Energy Price Cap

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This morning, Ofgem announced that energy bills will drop in the Autumn by an average of £151. Due to a drop in the energy price cap which covers 29 million homes, households are set to pay £1,923 annually, in comparison to the current £2,074.

What is the energy price cap?

In recent years, prices for variable tariff energy deals in England, Wales and Scotland have been controlled by the the energy price cap, which is now set every three months by Ofgem, the energy industry regulator. The energy price cap therefore limits how much energy suppliers can charge households for each unit of gas and electricity.

The price cap is meant to fall as wholesale energy prices falls across the market, allowing consumers to benefit through reduced bills. When prices soared after Russia’s invasion of Ukraine, ministers said household bills would be limited by a government guarantee instead. However, the Energy Price Guarantee has now expired which means that the Ofgem cap now determines households bills again. Ofgem said it was cutting the price that a supplier could charge for gas from 6.9p per kilowatt hour (kWh) today to 6.89p from 1 October. The price of electricity will fall from 30.1p per kWh to 27.35p.

Lower prices should signal the resumption of competition in the market, as suppliers start to offer fixed deals to customers. That means people will be able to switch supplier for a gas and electricity price that is set for a certain period of time.

Responses

Jonathan Brearley, chief executive of Ofgem said: “The situation is much more stable this year. We have a lot more gas available, particularly the gas that comes from other countries into boats in this country but the market is very tight”.

“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” he contined.

Moreover, Prime Minister Rishi Sunak celebrated the announcement, regarding it as “good news”.

However, energy consultancy Cornwall Insight does not expect energy prices to return to pre-Covid levels before the end of the decade at the earliest.

Moreover, the Labour Party has been critical of the Government and stated that they would deliver a proper windfall tax on oil and gas giants to tackle the cost of living. In particular, shadow energy secretary, Ed Miliband asserted that “13 years of failed Tory energy policy has left Britain as the most exposed economy in Western Europe to the effects of Putin’s war”.

Government support

Some groups across the UK who may struggle to pay bills are receiving additional help through cost-of-living payments:

  • £900 to households on means-tested benefits – paid in three instalments in spring, autumn and spring 2024
  • £300 for pensioner households next winter
  • £150 to people on certain disability benefits, being paid in the coming weeks

Vulnerable families can also claim help through the Household Support Fund, and from October 2023 the Warm Home Discount scheme will be in place.

Until the end of March, businesses had their costs limited under the government’s Energy Bill Relief Scheme. Under a new scheme running until March 2024, firms get a discount on wholesale prices, rather than costs being capped. Heavy energy-using sectors will also get a larger discount than others.

Final thought

A drop in energy bills is good news for households and businesses in the context of the cost-of-living crisis. However, prices still remain high and even with the reduction, people will still financially struggle as the Government sides with the oil and gas companies making record profits.

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