The energy price cap set by regulator OFGEM is not working in favour of customers, says a report – instead it is ‘costing people money and boosting inflation’.
The energy price cap – which sets a limit on the price per energy unit, not on customers’ bills – was introduced by market regulator OFGEM in 2019, with the intention of providing energy cost protection for 11 million customers on poor value ‘default tariffs’. But a new report by a centre-right think-tank, the Centre for Policy Studies (CPS) says that the cap has outlived its usefulness, and is now serving only to stifle competition in the energy retail market by acting as a de facto regulated price.
The CPS report says in part: “For almost two years almost all tariffs have been priced at or just below the capped level, with no evidence this will change in the near future – meaning the government is effectively setting the market price for energy and eliminating any chance of customers switching to a better deal.”
It likens the current energy price cap to a wartime measure, and suggests that a ‘peacetime’ regulatory regime would allow more competition, and hence lower prices.
The same point was made as far back as 2017, when energy provider Centrica said that “a cap
on all default tariffs would run excessive risks of undermining the competitive process, likely resulting in worse outcomes for customers in the long run.
However, the argument only works where there is true competition in the market. In the UK, a ‘big six’ of energy suppliers dominates the market, and many smaller companies went to the wall after recent rises in wholesale gas costs made their business models unviable.
Protections
The CPS report, which can be read here, also calls for stronger protections against fuel poverty, saying: “Alongside reform of the current price cap model, the Government should introduce stronger protections as a bulwark against fuel poverty…many… have argued for a ‘social tariff’, which would support households spending an excessive proportion of their income on energy bills (going further than current programmes such as the Warm Home Discount). This would better target state funding to those who need it, going beyond those in receipt of benefits to include those on lower incomes in energy inefficient homes. There will clearly be all sorts of details to resolve around precise eligibility, setup, how this new system should be funded and so on. But the coming consultation is the time to set out a longer-term system built for the current era of higher bills. As with the original vision for the EPC, there should also be protection for those on prepayment meters, given their vulnerability to exploitation and lower levels of
competition in that market.”
The CPS report comes as another report suggests that household energy suppliers could rack up £1.74bn in profits over the next 12 months. Over the previous six years, suppliers have seen the amount of profit they are allowed to make every year on the average customer on the variable tariff surge from £27 in spring 2017 to a high of £130 in early 2023. The figure currently sits at £60 per customer.
With energy bills expected to remain close to current levels, the energy firms are set to continue to profit from so-called EBIT and headroom allowances in the price cap.
The figures and predictions exclude any profits which firms may also make through Ofgem decisions relating to Covid and Ukraine allowances, which contributed to the recently announced high profits for British Gas and Scottish Power.
The figures come from the first Warm This Winter Tariff Watch report, produced in partnership with Future Energy Associates (FEA). FEA urged customers to exercise “extreme caution” when thinking about switching and fixing tariffs, but said there are some deals worth considering.
Fixed Tariffs
In the first few months of 2023 there were just five fixed tariffs available to small sections of the market; however in July alone that number doubled, with 10 fixed tariffs newly available on the market.
Simon Francis, co-ordinator of the End Fuel Poverty Coalition, which is part of the Warm This Winter campaign, said: “This report shines a light on the murky depths of Britain’s broken energy system. Without fundamental overhaul of the energy grid and energy tariffs, households will continue to lose out while suppliers will profit.
“Energy supplier profits predicted for the next 12 months could easily cover the cost of a ‘help to repay’ energy debt scheme and leave quarter of a billion pounds left over.
“But, in addition to network reform and immediate support, we also need to see urgent and sustained action to reduce our reliance on high levels of energy consumption, such as improving the energy efficiency of homes, driving an increase in cheap renewables, and a move away from the fossil fuel profiteers of the past.”
So how can homeowners save money on energy when there is reduced competition in the market and a lack of fixed tarrifs? Here are some top tips from Celebrity Angels‘ home economy experts:
- INSULATE YOUR HOME
Most essential, make sure your home is properly insulated. Energy is wasted through walls and roofs, so insulate lofts and cavity walls. It may have a high initial cost, but could save you around £300 a year. Eliminate draughts in windows and doors and block unused chimneys.
- TURN DOWN YOUR THERMOSTAT
Decreasing the temperature of your heating by just one degree could save £145 for the average home, says British Gas - ADJUST YOUR FLOW TEMPERATURE
If you have a combi boiler, set it to 60°C or below. The flow temperature is often set much too high, between 70°C and 80°C, and reducing it can save around £100 per year. - FIT A HOT WATER CYLINDER JACKET
Fitting a hot water cylinder jacket could reduce heat loss by up to 75% and save you as much as £60 a year according to the The Energy Saving Trust. - TURN DOWN RADIATORS
Don’t heat your whole house if you are not using all the rooms – you could save around £70 per year by turning down valves to 2.5 or 3 in rooms you are not using. You can also fit thermostatic radiatovr valves.
- SERVICE YOUR BOILER
This should be done every 12 months to make sure your boiler is working at peak efficiency. If it’s old, replace it with a more efficient new one. - FIT SMART METERS
Smart meters will give you an at-a-glance insight into your energy useage. Electrical smart meters are particularly useful since they will show you the energy being waster by devices on standby such as TVs and set-top boxes. The Energy Saving Trust says you can save £60 a year by switching devices off standby. Fit LED lightbulbs instead of halogen, low-energy or incandescents. - ECONOMISE ON APPLIANCES
Make sure your appliances are new and efficient, and use them effectively – for instance only run a dishwasher when it is full, and try to do one large clothes wash per week rather than several small ones through the week – and use cooler settings. Hang clothes outside to dry rather than using an energy-hungry tumble drier.
- SAVE ON COOKING
Rather than using an oven to cook, use a microwave or an air fryer. Don’t boil a full kettle for a single cup of tea.
- SAVE WATER
If your water is metered, fit a water-saving shower head, and ask your water supplier about other useful water-saving household gadgets
See also: Property Prices Fall Five Percent From Their Peak
