11 million households on poor value default energy tariffs will save an average of £75 per year under a new price cap to be introduced by Ofgem by the end of the year.
Domestic energy bills will be capped at £1,136 a year for typical dual fuel customers paying by direct debit, ensuring savings for the 11 million households on standard variable and pre-payment energy tariffs. Households on the most expensive energy deals, default tariffs from Scottish Power, could save up to £120 a year, Ofgem said.
The regulator was given the “duty and powers” to implement the cap through the Domestic Gas and Electricity (Tariff Cap) Act, passed by the Parliament into law in July to prevent loyal and under-informed energy consumers from being ripped off by suppliers. The cap, which will be confirmed in November and implemented before the end of December, will remain in place until 2023.
“Ofgem has made full use of the powers Parliament has given us to propose a tough price cap which will give a fairer deal to consumers on poor value default tariffs,” said Dermot Nolan, chief executive.
More than half of all British households are on default energy tariffs, because they haven’t switched supplier recently and their fixed tariff deals, offering cheaper, introductory prices for a set period of time, have expired.
Business and Energy Secretary Greg Clark said many of these “loyal customers were being exploited,” and that the cap is necessary to “end that injustice and protect households across the country from unjustified price rises.”
The price cap will be assessed by Ofgem every April and October and adjusted to reflect changes in the costs of supplying energy, such as changes in wholesale energy prices.
“Consumers can have confidence that falls in energy costs will be passed on to them and if costs increase, Ofgem will ensure that any rise will be due to genuine increases in energy costs rather than supplier profiteering,” Ofgem’s Nolan said.
Ofgem already caps bills for five million customers through its safeguard tariff, which covers the four million households with pre-payment meters and an additional million vulnerable customers on default tariffs who receive the government’s Warm Home Discount.
Lawrence Slade, chief executive of industry body Energy UK, said the cap “will pose a significant challenge” to the more than 70 domestic energy suppliers in the UK.
“It is crucial that the cap ensures we have an investible energy sector where efficient and financially robust companies can trade, and innovation and engagement can continue to flourish and deliver benefits for consumers,” he said.
He added that increasing energy efficiency was the best way for consumers to save money on their bills in the long term.
Consumer groups have also registered concerns that the price cap will increase consumer complacency and discourage households from seeking out and switching to cheaper fixed rate tariffs.