Ofgem reveals how energy price caps will work from later this year

More than 11 million additional households on “poor value” default tariffs are set to be protected from being overcharged by energy companies, if new proposals from Ofgem are to go ahead.

The plans from the energy sector regulator follow Parliament passing the Domestic Gas and Electricity (Tariff Cap) Act, which became law on 19 July, and gave Ofgem the obligation and required powers to institute a price cap.

It said it was working to have the cap in place by the end of the year.

When the price cap is introduced, suppliers would be required to cut prices to the level of or below the cap, proposed to be £1136 per year for a typical dual fuel customer paying by direct debit.

That would force them to scrap excess charges for customers on what Ofgem called “poor value” default deals.

The exact savings each individual household would make would depend on the price of their current deal, how much energy they were using, whether they had both gas and electricity, and how they paid for energy.

Ofgem said the cap would save consumers who used a typical amount of gas and electricity around £75 per year.

Many consumers on default deals used more energy than a typical household, the regulator claimed, so their savings would be higher, while those who bought their electricity and gas from separate suppliers would also save more.

A typical consumer on the most expensive tariffs would save more than £120, and in total, the price cap would save consumers around £1bn nationwide.

“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 the regulator’s chief executive Dermot Nolan.

“Once the price cap is in place, all households in Great Britain covered by the cap will be protected from being overcharged for their energy.”

Nolan said consumers could “have confidence” that falls in energy costs would be passed on to them and if costs increased, Ofgem would ensure that any rise would be due to genuine increases in energy costs rather than supplier profiteering.

“Households protected by the cap will be able to save even more money by shopping around for a better deal.

“Meanwhile, Ofgem will continue with reforms which aim to deliver a more competitive retail energy market which, combined with protection for those who need it, works for all consumers,” Nolan added.

The regulator would update the level of the cap each April and October, to reflect the most recent estimated costs of supplying electricity and gas.

That, Ofgem said, would ensure households who were covered would always pay a “fair price” for their energy.

The price cap was designed as a temporary measure, however, to be in place until 2023 at the latest.

Ofgem said that means it had time to put in place further reforms to make the energy market more competitive, and work better for all consumers, including making switching energy supplier easier, faster and more reliable.