The Ofgem Price Cap on Energy Prices – How does it Affect you?

- by Natalie Stone

The recent Ofgem price cap on pre-payment energy meters will benefit over 3 million households in the UK. You may be one of those to whome the saving means the difference between taking out same day funding payday loans or not. Here is a closer look at exactly what this means for customers who use this kind of service to fuel their homes.

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Ofgem have chosen to tighten the pay cap for clients using the pre-payment meter system. They think this will benefit around 3 million customers. The change will be in effect from 1st October 2017. Ofgem price cap aims to reduce average fuel bills by £19 pounds a year. Under the new price cap, previous bills of around £1,067 pounds a year will cost £1,048 pounds annually. Ofgem reviews the price cap every six months in April and October. Ofgem is a short form of Office of Gas and Electricity Markets, an independent national regulatory authority. Their primary objective is to protect the interests of current and future energy consumers. They promoting monetary savings for customers, supervise energy suppliers and enforcing government regulations. They collect funds from companies they regulate who need to have a licence to operate.

ofgem price cap - cashfloat

When was the first energy price cap introduced?

The Competition and Markets Authority conducted an investigation last year into the prices that many households were paying for their energy. They found customers on standard variable tariffs were overpaying energy suppliers by an estimated 1.2 billion a year. These findings led Ofgem to initiate price caps to help clients using pre-payment meters. These price caps should lead to savings that will mean you can avoid taking out no guarantor short term loans to finance the electricity bill. Ofgem condemned energy vendors who raised the prices of their energy earlier this year.

Why do people on pre-payment meters need help with electricity bills?

There are about 6 million pre-payment meters installed in UK homes by energy companies. Companies installed these meters in homes of people who were unable to pay their quarterly energy bills. However, paying for energy in advance, as opposed paying in arrears, companies can control the payment method and not lose money. In hand with this payment method, companies split arrears repayments into a more manageable monthly small sums.

ofgem price cap - cashfloat

While pre-payment meters can help people budget for their energy consumption, they often end up paying the highest amount of money for their energy. There are not many good deals for customers using this payment method. Pre-payment customers usually spend more money per unit for their power. Most noteworthy, they do not have access to the good deals on the market. Suppliers charge different prices, so they sometimes save money by switching supplier. Most noteworth, a report published last August found that pre-payment meter customers paid an average £220 more annually than customers on the best energy deals.

So what have we learned so far?

  • Firstly, energy regulator Ofgem has increased the price cap for pre-payment meter customers
  • Secondly, the changes will affect 3 million households
  • It will take effect from October 1st
  • Ofgem regulates energy companies and fights for better value for customers
  • The first pay cap was in April after the result of an investigation into high energy prices
  • Finally, customers using pre-payment meters do not have access to the best energy deals

What did energy companies have to say about the new energy price cap?

Leading energy suppliers have argued that they based their price increases on the longer term view of their costs. People believe that the Ofgem price cap, however, is based on an overestimate of the cost of supplying energy for the coming winter. Many companies buy their energy two years in advance. They have to anticipate the costs over an extended period of time. Companies have had to spend vast amounts of money on supplying new ways of producing greener power to meet government plans for a low carbon economy.

ofgem price cap - cashfloat

After the recent price hike by British gas to raise electricity prices by 12.5%, many households were left wondering how they would cope to pay their bills. You want to be able to pay the bills wihtout resorting to taking unsecured payday loans. The long-lasting pay cap for government workers and the devaluation of Sterling after the Brexit vote, resulting in inflation at its highest levels for years, resulted in many households struggling to survive without having to rely on payday loans and other forms of high-interest credit.

A recent uSwitch  survey has uncovered energy poverty in Britain

ofgem price cap - cashfloat

However, of the 27% of customers who never switched energy provider, 33% didn’t believe that they would save any money, 19% thought that all energy suppliers were the same and 17% thought that the process to switch was very complicated. Customers who have been with the same provider for over two years and haven’t chosen a new tariff will possibly be paying an average of £304 more annually than the cheapest deals on the market.

Which conclusions can we draw about the Ofgem price cap for pre-payment meter customers?

Probably, the latest Ofgem price cap will lighten electricity bills for many families on the most expensive pre-payment mater tariffs. Research shows an alarming amount of people are struggling to pay their household bills. This new price reduction may help a little bit. Energy companies welcome a new government review of energy prices that will be more transparent regarding the cost of producing green energy for suppliers. Ofgem price cap faces review again in six months, possibly leading to further savings for customers. Customers will likely be overjoyed to avoid taking out UK loans online to pay the energy bills.

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About The Author
Natalie Stone
Natalie Stone is an accomplished writer. In her 'spare time' she paints in watercolour and acrylic. Her favourite scenes are of sunset over the sea, or of poisonous snakes in the rainforest. She wishes you success with your financial pursuits!
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