Coronavirus impact: Ofgem reduces energy price cap limit

  • Aug 09, 2020 BST
  • Team Kalkine
Coronavirus impact: Ofgem reduces energy price cap limit

Summary

  • Due to the impact of the coronavirus on the wholesale energy market prices, Ofgem has reduced the energy price cap to record lows.
  • Energy bills for 11m UK households to be cut by £84, besides the cap for pre-payment energy meter customers to be lowered by about £94 a year.
  • As consumers constantly shop around for better deals available in the market, companies focus on increasing their market share by introducing better customer service and other loyalty schemes, and providing greener energy options.

In its half yearly reviews, the energy regulator, Office of Gas and Electricity Markets (Ofgem) has reduced the energy price cap to record lows as the outbreak of the coronavirus pandemic has severely impacted the wholesale energy market prices. The energy cap price that began in January 2019 will decline to its lowest levels as the demand for energy, gas, and electricity market prices have plummeted to historic lows due to the impact of Covid-19 pandemic. In its recent announcement, the regulator has lowered the winter energy bills for 15 million UK households.

Details of the price cap for the winter season and outlook for next spring season

Starting from October 2020, the cap on default dual-fuel energy tariffsfor 11 million households will be down by £84, from an average of £1,126 per year to a record low of £1,042. This cut in levy announced for standard variable energy is short from the industry projections of at least £85 and up to £100 a year. The new cap on energy bills for customers who use pre-payment energy meterswill be lesser by an average of £94 on an annual basis, lowering the overall cap to £1,070 for a year.

During the lockdown period, the energy market prices toppled to 20-year lows. It is pertinent to understand that the domestic consumption was more in these months as people stayed at home and businesses including manufacturing units, hospitality companies, corporate offices, and schools were shut. With the restart of economic activities, the demand for energy has started rising, leading to increase in prices. This trend could result in higher energy bills for coming spring season. Given this scenario, Ofgem cautioned that with recovery in the gas market, the cap could also scale upwards from April 2021.

To guarantee fair energy bills for the Britishers, the energy watchdog, Ofgem decides the cap on energy bills after every six months. This adjustment in pricing is a mirror of the costs borne by the energy company. It is to be noted that the costs have seen a downward slide, given the lower cost of gas and electricity that they buy in advance from the wholesale markets.

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Introduced in January 2019, the cap scheme aimed to understand how much households, who were earlier on pricey default tariffs, are likely to pay for their energy consumption on a yearly basis. Given the new cap, it is estimated that 11million customers on standard variable tariff (SVT)or energy supplier's default tariff, if do not switch to a competitively priced fixed or variable tariff, would lose out on a saving of more than £3billion. It is assessed after six months to see any developments in the energy market including wholesale costs, network costs, policy costs, operating costs, and prepayment meter costs. 

Regarding the changes brought in for this winter, Ofgem stressed that this would be a huge saving for many UK households who suffered financial troubles due to the Covid-19 crisis. Citizens could additionally decrease their energy bills by searching for better deals provided by energy companies.

Expert view on the price cap

Some experts disagreed with this view and highlighted that people could be benefitted more by switching to a fixed tariffregime.UswitchLimited, a UK-based price comparison service and switching website, pointed out that the reduction in energy bills for SVT customers are due to the fall in wholesale energy prices in early 2020 due to the coronavirus induced lockdown. The website explained that Britons could save more by moving to a default tariff as there is a gap of £232 between the new pricing for winter and the cheapest fixed deal available in the market at present.

Regarding the fear raised by Ofgem on rise in price cap from April 2021, Uswitch stressed that a 12-month fixed deal would be a better choice for consumers.As the lockdown put a hold to some update and reform related activities in the energy industry, the regulator has suggested that this temporary price cap would remain in place in 2021. Because of this reason, people having standard plans could anticipate either upward or downward movement of their bills every six month for a long time.

Talking of the suppliers, Uswitch observed that the new lowering of price cap could also bring additional strain on providers with tighter margins. The cap in pricing leads to unhealthy competition among the industry players. Besides not providing better and suitable tariffs, companies concentrate less towards customer service aspects to compete for grabbing more market share. It has been observed that some of the energy suppliers have faced condemnation as they priced their default tariffs at the limit and used it as a target instead of a real cap. 

A study from Compare the Market (comparethemarket.com), another price comparison website in the UK has presented that people could save an average of £302 every year by switching to one of the most competitive tariffs, whetherfixed or variable. In its latest Energy Price Cap Update, the website presents that the average price for the top 20 cheapest available tariffs on the market is £825. This effectively results in saving approximately £302, if people switch their providers rather than stick to the SVT. It also analysed that the prices in the market have fallen to the lowest level in almost three years, with the average cheapest available dual fuel tariff costing around £800 at present. This examination was conducted for the current price cap level that became effective on 1 April 2020.

How the price cap affects the industry players

Some of the leading players in the industry including the big six group have voiced their opinions regarding the energy price cap system by the regulator as predominantly unintended and detrimental consequences stating that wider price interventions are not supportive in nature. Many from this group complain regarding the regulator interfering with their operations as they control some utility-scale power plants. This implies that they generate revenue from both ends of the market including energy production and energy supply.

Given the deregulation in policies, these bigger companies enjoyed a monopoly but have lost around 20 per cent market share in past few years.  This is mainly because people have chosen smaller suppliers. Despite this reduction in their customers, they provide energy to around 70 per cent of the domestic consumers in the UK.Some of these companies like SSE plc suffered on its profit due to a steep slide in their retail energy business.Another company, British Gas with its parent company, Centrica, have showed discontent on the price cap for their current financial strain leading to job cuts.

Some experts believe that these bigger energy companies have leveraged on the chaos and despair of the customers to make profits. They recommended that these companies should have worked towards building strategies for providing incentives and other loyalty schemes to the customers, better customer service, and complimentary home energy perks. Many smaller and medium size companies in the energy sector have satisfied their customers with competitive customer service and greener energy options.

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Conclusion

The consumers cannot be fooled for long on benefits they get from their suppliers and constantly look for companies that provide better deals both in terms of services and cost. The cap in energy pricing has raised a debate for the companies on ways to retain their customers and also add newer ones. Customers are also increasingly aware of the need to contribute towards climate change and make the planet a better place to live. While customers do not want to pay extra and will keep shopping for better deals, it remains to be seen how the industry players attract more customers by providing greener options from renewable sources of energy.

 

 


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