Up to five million vulnerable and prepay energy customers could see their bills rise by an average £58 a year after the regulator Ofgem announced it is to increase its price cap.
From 1 April, the price cap, which covers around four million prepayment customers and a further one million vulnerable customers on standard credit meters, will go up from the current average of £1,031/year to £1,089/year, based on typical use.
According to Ofgem, rising energy wholesale costs - which is what suppliers pay for gas and electricity - are to blame for the rise, alongside the costs of supporting low carbon energy.
While the cap is set to rise though, it doesn't necessarily mean everyone's bills will going up, as suppliers are free to set the cost of their tariffs below the cap, and some have done so.
Both prepay and credit meter customers can beat any hikes. Switching from a standard big six prepay tariff can save an average £55/year on typical use, or more than £200/year by switching to a credit meter and grabbing a cheap fix.
If you're already on a credit meter and you're now covered by the cap, most Warm Home Discount providers offer cheaper fixes, and you'll still get the discount.
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'A dangerous halfway house'
Commenting on the impact of today's announcement on the one million customers protected by a price cap because they get the Warm Home Discount, MSE founder Martin Lewis said: "The rise in the price cap leaves the whole thing feeling somewhat flaccid. For someone on typical bills of £1,132 a year, paying by direct debit, it is a reduction of just £43 – and even for those on the worst big six tariff it’s just £77.
"Contrast that to the £300+ annual savings available to those who switch, and it raises a worry that a continued erosion of the reduction will leave this as a dangerous halfway house giving vulnerable customers false comfort that they are not being ripped off, while disinclining them from engaging in the switching market where they’d save large.”
Who's affected by the rise?
Ofgem's price cap has covered around four million prepayment customers since April 2017, but was extended last week to a further million vulnerable customers who are on standard credit meters, a standard variable tariff and get the Warm Home Discount.
Potentially all five million households covered by the price cap could be hit price rises following today's announcement, though it's up to individual prepayment and Warm Home Discount suppliers to set their prices, so actual price increases as a result are likely to vary by supplier.
How does the price cap work?
The price cap sets a maximum amount that suppliers can charge for each region and meter type.
The price cap was initally set at £1,050/year - on average and based on typical use - when it was introduced in April 2017. In October, Ofgem lowered the cap, reducing the maximum amount suppliers can charge to the current level of £1,031/year.
The latest annoucement will see the level of the cap jump past the original limit to £1,089/year.
The cap is reviewed twice a year - with any changes taking effect in April and October - to reflect the estimated underlying cost of supplying energy.
How good is the price cap?
This depends on what kind of customer you are:
- For prepayment customers, the current average big six standard tariff - which most are on - costs a typical £1,028/year, just below the current price cap of £1,031/year. Should suppliers increase their prices to meet the level of the new cap in April, prepay customers could see bills rise by as much as £61/year.
- For vulnerable customers on credit meters, it's a slightly different story. While the price cap is again £1,031/year currently, the actual tariffs offered by the 13 suppliers covered by the cap vary considerably from what we've seen so far, from £936/year to £1,030/year. An increase in the cap could result in an increase in bills, but it remains to be seen what suppliers will do in April.
What can I do to avoid any hikes?
If suppliers do hike prices when the cap increases, you can do a comparison to see if you can save by switching away.
If you're on prepay, the best savings come from switching to a billed meter. All the big six suppliers will do this free - though most require you to pass a credit check and have a good repayment history.
For someone on a big six standard prepay tariff, switching to a billed meter and grabbing the cheapest deal could save a typical £220/year - more if prices rise in line with cap. See Prepaid Gas and Electricity for more on how.
If you're already on a billed meter, and you're now covered by the price cap, you can still switch and keep the Warm Home Discount. Do a Cheap Energy Club comparison and select 'Warm Home Discount' from the filters on the left (above on mobile) to find your cheapest.
What does Ofgem say?
Dermot Nolan, chief executive of Ofgem, said: “Protecting vulnerable customers is a priority for Ofgem. That’s why we have extended the prepayment safeguard tariff to almost one million vulnerable households, which will help deliver a fairer, smarter and more competitive market for all consumers.
"Even when energy costs rise, people on the worst deals are better off under the safeguard tariff as they can be sure that they are not overpaying for their energy and any rise is justified.
“Ofgem is working with the Government to protect all customers on poor value default deals, such as standard variable tariffs, from being charged too much for their energy as soon as possible. Our aim is to protect those who do not switch, while making it easier for those who do to get a better deal.”