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The maximum amount an estimated 15m households can be charged for their gas and electricity will fall by £84 over a year after the energy regulator cut the cap on charges to reflect a sharp decline in wholesale prices due to this year’s coronavirus-related slump in demand.
The cap will be reduced to £1,042 per year for the six winter months, starting in October, the lowest level since it was introduced in 2019, the UK’s regulator Ofgem said on Friday.
Caps on energy bills protect an estimated 15m households that are either on variable — rather than fixed — tariffs for their electricity and gas, or have pre-payment meters in their homes.
Jonathan Brearley, Ofgem chief executive, said millions of households financially affected by the Covid-19 crisis would see “big savings on their energy bills this winter when the level of the cap is reduced”.
The regulator also said it would advise the government to keep the price caps until 2021. The main energy price cap, which covers an estimated 11m households on variable energy deals and is reviewed every six months, was introduced at the start of 2019 following a pledge to end “rip-off energy prices once and for all” by former prime minister Theresa May.
“The price cap is the single most effective consumer protection measure we’ve seen on energy costs and it’s been a phenomenal success, saving 11m customers £1bn on their energy bills in 2019 alone,” said Greg Jackson, Octopus Energy’s chief executive.
“With households using 20 per cent more electricity than usual, and many facing an uncertain future, the price cap is more important than ever,” he added.
The Energy Ombudsman on Friday praised the move, saying it represented “a much-needed financial boost” for millions.
Wholesale prices have plunged this year amid a broader economic slump as energy demand was knocked by the lockdowns and the subsequent closure of many businesses and industrial sites.
UK energy demand fell to record lows after lockdown came into force in March, according to National Grid, which oversees the UK’s electricity system.
Electricity prices turned negative on several occasions as the slump in demand also coincided with sunny and windy weather conditions that led to a surge in renewable power generation.
Wholesale gas prices have started to recover since, Ofgem said, and if they continue to rise over the coming months, the cap is likely to rise in April to reflect the higher costs.
The pre-payment meter cap, which was aimed at protecting largely vulnerable households, was introduced in 2017.
The policy at the time proved controversial with some Conservative MPs as it was seen as the government meddling in free markets. The Labour party claimed the Tories were being hypocritical for mimicking its “energy price freeze” policy from 2015, having attacked it at the time as quasi-Marxist state intervention.
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