Customers to pay less for energy bills from summer, says Ofgem

Energy regulator Ofgem has today (Thursday 25 May 2023) announced its quarterly update to the energy price cap for the period 1 July - 30 September 2023. 

From 1 July, the energy price cap will be set at an annual level of £2,074 for a dual fuel household paying by direct debit based on typical consumption, which reflects recent falls in wholesale energy prices.

The new price cap represents both a reduction in last quarter’s cap, and also a reduction in how much customers will pay on their bills. Since October 2022, consumers have been supported by the Government’s Energy Price Guarantee, which caps the typical bill at £2,500.

* Figures are for typical domestic consumption paying by direct debit, and will vary based on actual household usage.

Today’s update means that, for the first time since the global gas crisis took hold more than 18 months ago, prices are falling for customers on default tariffs. The savings can now be passed on to customers more quickly, thanks to Ofgem now updating the price cap quarterly rather than every six months.  

At its peak, the price cap reached £4,279 and, whilst today’s level is lower than last quarter, it is still above the levels it was before the energy crisis took hold, meaning many households could still struggle to pay bills.  

While the price cap has dropped from its winter peak, it remains well above the pre-2021 average, and many people will still find such high bills difficult to pay. Earlier this year, Ofgem CEO Jonathan Brearley highlighted that many households continue to struggle to afford their energy bill – therefore more focus will be needed for government, the regulator and the industry to support the most vulnerable groups this winter.

Ofgem CEO Jonathan Brearley said:

“After a difficult winter for consumers it is encouraging to see signs that the market is stabilising and prices are moving in the right direction. People should start seeing cheaper energy bills from the start of July, and that is a welcome step towards lower costs. 

“However, we know people are still finding it hard, the cost-of-living crisis continues and these bills will still be troubling many people up and down the country. Where people are struggling, we urge them to contact their supplier who will be able to offer a range of support, such as payment plans or access to hardship funds.  

“In the medium term, we’re unlikely to see prices return to the levels we saw before the energy crisis, and therefore we believe that it is imperative that government, Ofgem, consumer groups and the wider industry work together to support vulnerable groups. In particular, we will continue to work with government to look at all options.”  

Today, Ofgem is also consulting on the next steps in its drive to make the retail energy sector more resilient to turbulent market conditions, after a number of suppliers failed during the energy crisis as they did not have enough capital to stay in business. Some of the costs of those failures were shared among all energy consumers.   

Ofgem has already brought in tougher rules for companies’ finances to reduce their risk of failure, has introduced regulations on how much they can rely on customers’ credit balances and Renewable Obligation contributions as working capital, and has enhanced the ‘fit and proper’ tests for energy company directors.   

These changes mean that energy suppliers will need to be able to raise more capital and, to be able to do that while still being able to make a reasonable profit within the price cap, Ofgem is proposing that the element of the price cap that covers profit margin – known as Earnings Before Interest and Tax (EBIT) – will see a small increase.   

Under these plans, the EBIT allowance will allow an efficient energy supplier to make a reasonable profit that reflects its business model and ensure it can be investable in the long term, while keeping a lid on excess profits.   

For the October price cap, the EBIT allowance is indicatively expected to be £37 for the typical bill. Under the proposed changes, the EBIT allowance in the typical annual bill would be around £10 higher, with the new EBIT allowance being set at around 2.4% of the full price cap level in that period. By contrast, supplier failures during the gas crisis cost each household an average of £83 and Ofgem is determined not to see a repeat of this situation.   

Ofgem has issued guidance to energy suppliers which sets out the conditions they need to meet if contemplating paying dividends to shareholders. The overarching principle is that suppliers that need to improve their capital position should use profits to build their capital, rather than paying dividends. 

Today’s further publications are designed to protect energy customers, increase the core resilience of the whole energy market and support the delivery of the price cap.

These are: 

• Supplier earnings before interest and tax (EBIT) statutory consultation 
• Price cap extension final decision 
• Call For Input on operational expenditure 
• Typical Domestic Consumption Value final decision 

The next quarterly price cap update will be in August 2023. 

ENDS

NOTES TO EDITORS

Energy price cap explained | Ofgem 

The energy price cap was introduced by the government and has been in place since January 2019, and Ofgem is required to regularly review the level at which it is set. It ensures that an energy supplier can recoup its efficient costs while making sure customers do not pay a higher amount for their energy than they should. The price cap, as set out in law, does this by setting a maximum that suppliers can charge per unit of energy.

Anyone on a fixed tariff should speak to their supplier about moving to a standard variable rate tariff. While there may be an exit for moving off a fixed tariff early, this is likely to be very small compared to potential savings.

Ofgem has robust rules in place to help people in vulnerable situations, and suppliers are obliged to offer payment plans and direct customers to available support.

Bill-payers will continue to receive additional support via the EPG until the end of March 2024, as confirmed by the Chancellor on Thursday 17 November 2022. The level of this support is set by Government.

There is no immediate action for consumers to take as a result of today’s announcement.    

The EBIT statutory consultation is part of a package of measures to create a more resilient and investable supply sector. This will ultimately benefit consumers, as it protects them from the cost of supplier failures and enables investment to improve the quality of services. Ofgem is setting out our minded-to position on a revised EBIT allowance for cap period 11a onward.

We anticipate seeing an increase of the allowance to a level equivalent to 2.4% of EBIT in Q4 2023 (in comparison to the 1.9% in the current allowance). We believe the increase in necessary to allow the sector to attract investment and help towards achieving improved financial resilience. Beyond that, we have made changes to the way the allowance scales with overall price cap level, which means consumers are better protected in the event of a price spike in the future.

Updated number of customers on different tariff types as of April* 2023

• New no. of customers on SVTs – ‘around 29 million’
• New no. of SVT (non-PPM) customers – ‘around 25 million’
• New no. of SVT PPM customers – ‘around 4 million’
• Total number of customers on fixed tariffs: 'around 3 million' (with the vast majority being non-PPM)

* Latest Financial Responsibility Principle RFI data is for March 23. Tariff and Customer Account RFI data is as of April 23 (used to calculate the SVT payment method splits).

The Energy Price Guarantee is a Government support measure to protect consumers with the level of support decided upon by Government.    

Ofgem administers the scheme and publishes cap rates on a quarterly basis.   

The tariff cap was legislated by government in order to protect default tariff customers (i.e. those on standard tariffs) from being overcharged.  Price cap updates are currently published on a quarterly basis.   

The price cap level is based on typical use for an average household and is a cap on energy unit price not a cap on total bills. For an individual customer, the amount they will pay varies depending on how much energy they use, where they live, and how they pay for their energy.   

The methodology for setting the price cap is set out here and is regularly reviewed by Ofgem:   

Section 5 sets out future price cap dates: Energy price cap explained | Ofgem

Published cap levels for the charge restriction period 10b of the default tariff cap: 1 July 2023 – 30 September 2023.   

The price cap protects around 29 million customers on default or variable rates. The £2,074 per year level of the cap is based on a household with typical consumption on a dual fuel electricity and gas bill paying by direct debit.  The price cap is now updated on a quarterly basis. More information on this can be found on the "Ofgem confirms changes to the price cap methodology and frequency ahead of new rate to be announced later this month" press release. 

For customers who pay by standard credit (cash or cheque) pay the default cap has decreased by £1,270 from £3,482 to £2,211 for typical dual fuel consumption.  The additional costs reflect the higher cost for energy companies to serve them. 

The 29 million customers protected by the price cap includes around 4 million prepayment meter (PPM) customers. The PPM level of the default cap has decreased by £1,248 from £3,325 to £2,077 for average dual fuel consumption.  The additional costs for PPM customers reflects the higher cost for energy companies to serve them. For electricity only customers on Economy 7 paying by Direct Debit has decreased by £882 from £2,282 to £1,400 for typical consumption (4,200 kWh).   

The values shown in the text above include VAT and are expressed for the current Typical Domestic Consumption Values (TDCV) of 2,900kWh of electricity, 12,000kWh of gas, and 4,200kWh of electricity for Economy 7. 

The price cap is a cap on a unit of gas and electricity, with standing charges taken into account. It is not a cap on customers’ overall energy bills, which will still rise or fall in line with their energy consumption. From 1 July the equivalent per unit level of the price cap to the nearest pence for a typical customer paying by direct debit will be 30p per kWh for electricity customers and a standing charge of 53p per day. The equivalent per unit level for a typical electricity multi-register customer is 29p per kWh and with a standing charge of 53p per day. The equivalent per unit level for a typical gas customer is 8p per kWh with a standing charge of 29p per day.   

Breakdown of costs in the energy price cap   

Dual fuel customer paying by direct debit, typical energy use (GB £) £2,074. 

The charts above shows indexed wholesale prices from cap period 10b (July – September 23) to cap period 11a (October - December 2023). Wholesale costs make up the majority of a customer’s bill.   

Prior to October 2022 update – we observed wholesale prices for future delivery over an indexation period. This was carried out twice a year, from the preceding February to August for the winter period (October - March) and from September to January for the summer period (April - September). The fixed horizontal lines show the average wholesale cost allowance for each six month price cap period based on the price of the relevant forward looking energy contracts (the jagged line).   

From October 2022 to March 2023, as set out in our 4 August decision document, the wholesale allowance calculated within the price cap uses a transitional approach to price indexation compared to previous periods as such they are not directly comparable.

From April 2022 we have determined the wholesale cost allowance within the price cap four times a year, based on the price of the forward-looking energy contracts over the previous three months.   

The fixed horizontal line represents the weighted average wholesale cost allowance for the three month price cap period based on the price of the relevant forward looking energy contracts and number of observed trading days (the jagged line). 

Wholesale gas price costs in the energy price cap 

Wholesale electricity price costs in the energy price cap 

Data sets behind these graphs are proprietary and can be sourced from ICIS.