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Higher wholesale costs push up energy price caps

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07/02/2019
From 1 April, the levels of the default tariff price cap will increase by £117 to £1,254 per year, reflecting rises in wholesale energy costs. The pre-payment cap will rise to £106 to £1,242.

Ofgem said customers on default deals are still better off and without the cap they could be overcharged by £75-£100 a year. The regulator adjusts the level of the caps twice a year to reflect the estimated costs of supplying electricity and gas to homes for the next six-month period. It will be reset again in August.

Ofgem added: “Around £74 of the £117 increase in the default tariff cap is due to higher wholesale energy costs, which makes up over a third (£521) of the overall cap. Higher wholesale energy costs have similarly pushed up the level of the pre-payment meter cap.

“Last year higher oil prices, amongst other factors like the higher demand for gas from the ‘beast from the east’, led to a rise in wholesale gas prices. Because of the importance of gas as a source of electricity generation, this also led to higher wholesale electricity prices.”

Other costs include network costs for transporting electricity and gas to homes and costs associated with environmental and social schemes (policy costs).

Higher than expected

Stephen Murray, energy expert at MoneySuperMarket, said the rise was even higher than the large increase widely predicted over the last few weeks: “The cap was put in place to protect consumers from overpaying on their energy, but right now it’s doing anything but that. It’s only taken five weeks for it all to unravel, and households up and down the country will be scratching their heads in confusion and wondering how the claims of ‘fair prices’ and ‘£76 per year saving’ have disappeared, and so quickly.

“The price cap was delivered against a market backdrop that was almost certain to wipe out the initial savings immediately, and that has proved to be the case. The cap is determined by a number of external factors, such as the cost of buying energy on the wholesale market, which means it can go up as well as down. All this provides scant protection for consumers, compared to the peace of mind of taking control of your bills. And that’s exactly what households on standard variable tariffs have to do, now. If you want to bring your bills down you have to take matters into your own hands.”

Sally Jaques, head of energy at the auto-switching service weflip, added: “On top of that you’ve got a potential judicial review against the regulator Ofgem, led by Centrica – the parent company of British Gas.  They say they don’t want to scrap the cap, but it is clear that what they want is to be able to charge customers more than the cap, so they are challenging the way it is calculated.

“It proves the point that consumers weren’t safe left to the big providers and their SVTs.  But the cap isn’t giving energy customers a good deal either.”

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