Ofgem, the energy regulator, announced a reduction to the Energy Price Cap on Thursday, which is set to see a long-awaited drop in energy bills for millions of households across the UK. The new limit will come into effect from July, to be reviewed every quarter thereafter.
The Price Cap limits the amount that suppliers can charge for their standard variable tariffs (SVTs), the default deals that individuals are switched to after their fixed or variable tariffs end. In the midst of the energy crisis, most households are now on SVTs, with almost no suppliers currently offering fixed deals.
As the Cap was forecast to exceed £3,000, the Government introduced the Energy Price Guarantee (EPG) last Autumn. This measure froze the unit cost of gas and electricity so that the average household would pay around £2,500 pa.
However, the reduction in the Cap means that it is now lower than the Government’s Guarantee, down from £3,280 to £2,074. As a result, the average household will pay roughly 17% less than they are currently paying under the Guarantee.
For the first time in 18 months, energy prices are beginning to fall for those on SVTs. It is important to note, however, that this isn’t the maximum that you will pay, but the limit on the unit rate that can be charged for the energy you use.
Return of Fixed Rates?
Given the reduction in wholesale energy costs, which appear to now be being slowly passed to the consumer, we may see suppliers begin to offer fixed tariffs again. Tying into a fixed deal can be a good way to keep energy bills at an affordable level. However, the risk is that you fix your tariff and then the standard rate decreases, meaning that you are tied in at the higher cost for the remainder of the term.
If/when fixed deals return to the market, deciding whether to tie in will likely be a gamble, as we don’t know for certain which way prices will go over the coming year. Either way, the latest Cap reduction is a welcome step in the right direction.
As always, if you have any questions on the above, please feel free to contact a member of the team.