By Nina Chestney
LONDON (Reuters) – British energy regulator Ofgem on Monday lowered its price cap on household energy bills from April, but this will offer little relief to consumers as energy costs continue to rise.
Wholesale energy prices have fallen by around 50% from last December but retail bills for households and businesses do not yet reflect this. Here are some reasons why:
OFGEM’S PRICE CAP
Ofgem’s price cap came into force in 2019 on standard variable tariffs (SVTs) to cap energy suppliers’ profits. SVTs are among the most common tariffs in the country due to many suppliers no longer offering fixed-rate tariffs.
The regulator sets a maximum price that energy suppliers can charge consumers for each kilowatt hour (kWh) of energy they use. The price cap doesn’t cap the total bill; that can change depending on how much energy is used.
Ofgem reviews the cap every three months to reflect inflation and underlying cost changes.
In its latest review, the cap will be around 1,000 pounds lower at an annual average 3,280 pounds from April to the end of June. But this has been superseded by the UK government’s Energy Price Guarantee as a cap on consumer energy bills until April 2024.
ENERGY PRICE GUARANTEE
The government guarantee is a temporary measure to protect consumers from increases in wholesale gas prices.
It currently reduces the amount which can be charged per unit of gas or electricity, to an annual equivalent of around 2,500 pounds ($2,995.75) for a typical household in Britain.
Energy bills will still be higher or lower depending on how much energy is used. The discount is applied automatically by the supplier.
The government guarantee will rise to 3,000 pounds a year from April 1, meaning consumers could see their bills go up by 500 pounds. In addition, a 400 pound energy bills support scheme will end by April.
WHEN COULD BILLS START TO FALL?
Wholesale gas prices have fallen in the last few months but it takes a while to feed through into household bills because energy providers buy supplies months in advance.
If wholesale prices keep falling, Ofgem’s price cap could fall below the energy price guarantee in July, resulting in lower energy bills.
But Ofgem said on Monday prices are unlikely to fall back to levels seen before the energy crisis as wholesale prices are likely to remain elevated for some time.
Consultancy Cornwall Insights forecasts that the price cap could be around 2,112 pounds in the third quarter and 2,118 pounds in the fourth quarter.
If wholesale prices keep falling, more fixed price energy deals could return to the market, bringing stability for some households.
WHAT CAN PEOPLE DO WHO CANNOT PAY?
Ofgem has urged people struggling to pay bills to contact their supplier to ensure they get all the help on offer. Suppliers are obliged to offer payment plans and advise customers where to find support.
The regulator has also said that while bills remain high, there is a case for examining the feasibility of a social tariff for the most vulnerable customers.
($1 = 0.8345 pounds)
(Reporting by Nina Chestney. Editing by Jane Merriman)
