Energy switching could return ‘within weeks’ as wholesale costs fall
Households could soon be able to start switching energy providers again to save money as wholesale gas and electricity prices fall.
Last year as energy prices soared after the Russian invasion of Ukraine, many fixed-rate deals were scrapped.
This meant for many households, the cheapest and only option was to stay on their supplier’s default or standard variable tariff.
These tariffs are currently protected by the Energy Price Guarantee (EPG), which was introduced in October 2022 which capped average bills to £2,500. However, this will increase to £3,000 from April.
As millions of households struggled with the huge rises to energy bills during the cost-of-living crisis, the Government also introduced the Energy Bill Support Scheme, offering £400 towards the cost.
But wholesale prices are now falling; they are down by more than 70% from their peak last August, according to think tank Resolution Foundation. This should help households as the Energy Price Guarantee is raised to £3,000, meaning less Government support to cover the cost.
Meanwhile, experts at energy consultancy Cornwall Insight said due to the falling wholesale costs, providers may start offering more fixed-rate deals soon. In turn, this could increase the number of households switching their energy supplier from July and drive providers to offer more competitive deals to switch to.
Household switching rates fall 80%
In 2019, the average number of households switching energy supplier was 496,000 per month, but this figure fell to 85,000 in 2022, a 82% drop.
This is because previously switching energy providers was one of the best ways to cut costs. Yet after energy prices began to rise in 2022, cheap fixed-rate deals started to disappear and there was no incentive for people to switch their energy supply.
But now, analysts at Cornwall Insight have said there is a good chance that suppliers will again start to offer fixed-rate tariffs that compete with the Government’s Energy Price Guarantee of £3,000 from April.
This, it said, will revive the benefits of switching suppliers and should mean prices start to come down for households.
However, it warned this outcome is subject to wholesale market volatility, adding that “early indications are that suppliers may be able to offer competitively priced tariffs within a matter of weeks”.
Kate Mulvany, senior consultant at Cornwall Insight, said: “The energy market is complex, making it difficult to predict the effects of policy changes on consumer behaviour and energy pricing.
“However, if suppliers’ costs decrease and Government-supported rates remain relatively high, it is likely we will see a significant revival in reasonably priced energy plans, with millions of households finally able to take advantage of the savings they have been missing out on for years.”
Prices will rise before they fall
Average energy bills are forecast to be £2,400 for the year 2023 to 2024. While this is still around 20% higher than in 2022 to 2023, it is a fall from the £3,000 predicted in the Autumn Statement last year.
But the coming year is still expected to “feel difficult”, according to the Resolution Foundation.
It said lower wholesale energy prices will bring “immediate relief to the Exchequer” and the forecasted £12.8bn price of the £3,000 Energy Price Guarantee for 2023 to 2024 will be reduced by almost 90% to £1.5bn.
These lower wholesale prices will mean the guarantee at £3,000 is likely to only be in place between April and June 2023, the Foundation added.
‘Disincentivising suppliers from offering competitive deals’
Energy regulator Ofgem introduced the Market Stabilisation Charge (MSC) in part to prevent providers from going bust.
It means that if wholesale energy prices fall by more than 10% from the current price cap (currently £4,279), the supplier that gains a customer pays a fee to the supplier that lost a customer.
It has been triggered since late December 2022 due to falling wholesale prices, and is likely to be triggered again as prices fall.
However, it means suppliers may not be able to offer deals at prices as low as they would have liked due to the cost implications of the MSC, according to Cornwall Insight.
Richard Neudegg, director of regulation at Uswitch.com, echoed this. He said: “During the energy crisis, providers have not really felt the threat of customers voting with their feet, risking complacency. A return to fixed deals will bring the benefits of competition back to the market, giving consumers the chance to pick or switch their supplier on the basis of who offers the best deals and customer service.”
“However, the market stabilisation charge implemented by Ofgem, which hits suppliers with charges every time a customer switches provider, alongside other measures, is actively disincentivising suppliers from offering competitive deals.
“It is not OK for customers to have their options artificially suppressed when the market otherwise would be making decent options available that gives additional certainty or savings.”