Ofgem price cap could be fixed for 2021

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Ofgem, the UK’s energy regulator, is in the process of consulting on the proposal that no further increase is needed to its price cap in 2021. The consultation intends to balance the concerns of energy suppliers and customers, with both recovering from the impact of the COVID-19 pandemic.

What is the Ofgem price cap?

The Ofgem price cap is a cap on the price you pay for gas and electricity if you’re on a standard variable tariff or a ‘default’ tariff - i.e. one you haven’t chosen for yourself. It came into effect in January 2019 and is supposed to be revised twice a year, taking the following into account:

  • Wholesale energy costs: how much a supplier pays for the gas and electricity it purchases to sell to you.
  • Network costs: costs relating to building, maintaining and operating the network which carries energy to your home (meaning the cap varies by region).
  • Policy costs: costs relating to government schemes.
  • Operating costs: costs relating to billing and metering services.
  • Payment method uplift allowance: costs incurred from billing through different payment methods. 
  • Headroom allowance: how much of a markup suppliers can charge to allow for uncertainty in their costs.
  • EBIT (Earnings Before Interest & Taxes): a fair rate of return on investment for suppliers.
  • VAT: a tax amounting to 5%.

The cap was put in place to keep providers from ripping off their customers, but is due to end in 2023, by which time Ofgem expects that other reforms will be put in place to render it irrelevant. In the meantime, however, the regulator keeps providers in check by limiting the amount they can charge you.

The price cap for the period of April 1, 2021 to September 30, 2021 is set at the following rates, which vary depending on the type of tariff you’re on:

Tariff type Ofgem price cap
Default dual-fuel £1,138
Prepayment £1,156
Standard credit £1,223

Source: Ofgem

Rates for fixed tariffs are not capped, nor are those for specific renewable energy tariffs granted exemption from the cap by Ofgem. For more information about the price cap, head over to Ofgem’s website, where you’ll find a dedicated page replete with information about it.

No further increases in the price cap for 2021

The price cap went up in April this year after being reduced in 2020 during the COVID-19 pandemic. This was to help energy providers recover from the crisis, but Ofgem is now intending to balance this concern with that of consumers by keeping it steady until 2022.

The proposition to keep the cap steady at the above rates is based on the idea that the UK economy is set to grow in the months to come. There is also said to be no evidence to show that providers will incur any extra costs beyond those provisioned for in April, when many customers saw their bills go up by nearly 10%!

Its consultation on keeping the price cap at its current rate beyond the present period will continue until June 15, and the regulator is seeking views from stakeholders with an interest in the level of the cap in the meantime. You must send your views to retailpriceregulation@ofgem.gov.uk by June 15 in order for them to be taken into consideration.

The decision reached from the consultation will be released in August and put in place when the current Ofgem price cap period expires on October 1.

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