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Summary
- Energy regulator Ofgem is planning to lift its price cap on energy tariffs from 1 April, which would impact about 15 million households.
- The hike aims to offset the rise in gas prices and aid energy companies recoup Covid-related unpaid bills.
- Consumer groups have called for fairer prices in the face of defaults, switching cost challenges, financial strains, and other factors.
UK energy regulator Ofgem announced it would lift its price cap on energy bills, resulting in a rise in tariffs by up to £96 scheduled, from 1 April impacting about 15 million UK households.
The upcoming hike is first of its kind and the tariffs will be raised every two years. The regulator said prices would rise by £96 to £1,138 for 11 million default tariff customers. It will increase by £87 to £1,156 for 4 million prepayment meter customers for six months from April.
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What’s a price cap?
The price cap is a government-mandated measure which ensures fairer payment for energy prices by consumers. It had come into effect on 1 January 2019 for default tariffs households. Prepayment meters have a different price cap. Notably, the cap places an upper limit on a unit of energy, not the total usage. Thus, if households consume more power, they will pay more.
The new hike was a fallout of the recent increase in gas market prices. The regulator stated the demand had bounced back from the steep fall in wholesale prices during the first lockdown in March 2020.
The impact
Previously, Ofgem had lowered the price cap by £84 in October 2020. However, the upcoming hike will bring energy bills back to their earlier levels. Moreover, the regulator has allowed energy companies to charge an additional £24 to cover bad debt from customers impacted by the Covid-19 crisis. It reasoned that extending the recoupment period of these unpaid bills would lead to higher repayment costs in the following year.
Consumer groups expressed concern over the move as many households are still reeling under the economic impacts of the pandemic crisis. They added that raising prices in this economic climate would lead to an increase in unpaid bills.
According to a recently published research by an independent charity network, Citizens Advice, households with energy bill payment delays had increased to 2.1 million. The number was up by 600,000 from the pre-pandemic figure.
Charities called for a fairer pricing due to switching costs, the undue financial strain on certain households, dampened jobs market and other factors. Lowest income households will bear an undue fiscal burden as poorly insulated homes cost £50 a month more than the better-insulated ones. Plus, the upcoming removal of government support schemes would further add to their pressure.
Additionally, prepayment metered households have a more challenging time switching, while fixed-rate deals suited for other homes have increased by over £50 to £851 in the last quarter.
However, the regulatory body stated that it had considered the Covid-related economic climate before adopting the measure. The price cap is reviewed and altered on a half yearly basis by Ofgem.
