Ofgem has announced the energy price cap has fallen by £999 to £3,280, in light of falling wholesale costs.
Although the price cap doesn’t directly impact customer’s energy bills, there are two ways the change will still affect household finances.
The price cap, which previously set a limit on how much customers were paying for their energy, has been replaced by the Energy Price Guarantee, which is currently at £2,500 but will rise to £3,000 in April.
The hike comes at the same time the Government support will be taken away, meaning most consumers will see their bills rise by a minimum of £66 and analysts, Cornwall Insight, predict in fact households will see energy bills increase by £500 a year.
When the new energy price guarantee takes effect in April, fewer households will qualify for energy bill support, as the government is reviewing the help it currently provides.
How does the price cap still affect energy bills?
Despite the cap not being used to limit how much people are paying at present, it is still used to calculate how much the Government will pay energy suppliers to limit bills.
As long as the level of the price guarantee is lower than the Ofgem price cap, the government will pay suppliers the difference to cover the cost of buying wholesale energy.
Currently, the gap between the Ofgem price cap and price guarantee is £780 per person. From April, it will be £280.
This means the changes are significant to tax payers as, if the price cap was lower, the Government would be paying more to suppliers which means there is less money to support people by lowering taxes and unfreezing thresholds.
It is also the case that even with a falling price cap, bills might not decrease as rapidly as hoped.
In part to avoid suppliers failing, which could raise energy bills, Ofgem introduced the Market Stabilisation Charge which requires all domestic suppliers acquiring a customer to make a payment to the supplier that is losing the customer.
This charge was introduced by the regulator to stop smaller suppliers offering very low tariffs going bust.
It means that if wholesale energy prices drop by more than 10 per cent from when the current price cap was set, now £3,280, the supplier that gains a customer pays the supplier that lost a customer in line with the charge.
This is calculated using a complex formula and is changing frequently.
It means that suppliers may not be able to offer deals at prices as low as they would have liked, due to the cost implications, and as wholesale prices could further drop in 2023, the charge could be triggered more frequently.
Experts have argued this charge should be dropped as it is preventing the return of a competitive market, disincentivising suppliers from offering fixed tariffs.
Richard Neudegg, director of regulation at Uswitch, said: “Current intervention, including the market stabilisation charge implemented by Ofgem, is actively dissuading suppliers from offering competitive deals that consumers desperately need.”