Price cap will not stop energy bill increases

Anyone expecting the government’s new default tariff cap to halt increasing household energy bills will be disappointed, according to energy market experts Cornwall Insight.

Ofgem has today (7 August) signed off a £47/year dual fuel increase in the energy safeguard tariff for the coming winter. The average household customer will see electricity prices rise £19/year and gas prices rise by £28/year, primarily due to higher estimates of wholesale costs for the period from 1 October 2018 to 31 March 2019. The cap is set at six-monthly intervals, and the next one for summer 2019 (1 April 2019 to 30 September 2019) is likely to be even higher.

Launching a new forecasting service from Cornwall Insight, chief executive Gareth Miller commented: “our new tariff cap predictor projects a £33/year uplift in the electricity safeguard tariff for summer 2019 on the level Ofgem has just set for winter 2018-19”. Policy (£16/year), networks (£5/year) and wholesale (£9/year) costs, the main elements of the household bill, are all projected to rise indicating pressure all along the value chain for energy suppliers.

“Household energy prices are set to continue to rise despite Ofgem’s safeguard tariff or the government’s default price cap, which is set to replace it later this year ”, Miller added. “At a constant consumption, the cap is increasing at 10% year-on-year because of rising input costs to suppliers. Only if wholesale costs fall sharply will the pressure abate.”

Notes for editors

  1. Ofgem’s existing safeguard tariff, which was introduced effective April 2017,  sets the maximum that energy suppliers can charge vulnerable customers on certain standard variable and prepayment tariffs. It is set every six months according to a methodology that covers their forecast costs and margins.
  2. The government has also recently legislated for a default price cap to apply to all standard variable tariffs, including those currently subject to the safeguard tariff. The new cap is expected to be in force from December 2018. Its methodology is currently being developed by Ofgem but is likely to be similar to that for the safeguard tariff.
  3. Cornwall Insight has developed a “tariff cap predictor” forecast for the safeguard tariff and that utilises the official safeguard tariff model with its own forecasts of industry and other costs. The “tariff cap predictor” will be extended to include the government’s default tariff cap when its methodology is finalised.
  4. In the current methodology, Cornwall Insight forecasts the electricity safeguard tariff for summer 2019 will further rise £33/year on winter 2018-19 to £630/year. All elements of the safeguard tariff are forecast to increase on those for winter 2018-19 with the largest contributions from policy costs (£16/year), network charges (£5/year) and wholesale costs (£9/year).
  5. For the rest of 2019 and 2020, should wholesale market prices remain the same as today, pressures for increases will abate with a £6/year fall for winter 2019-20 to £624/year and then £639/year for summer 2020 (based on the 3.2MWh consumption specified by the Competition and Markets Authority).
  6. Cornwall Insight’s tariff cap predictor is a new subscription service. It uses inputs including from its third party charges report and the official safeguard tariff model to derive regional forecasts by fuel for each component of the safeguard tariff for each six-monthly tariff period to Summer 2020 (1 April 2020 to 30 September 2020).
  7. The predictor will be updated each time Ofgem sets a new level for the safeguard tariff or default tariff cap, which we expect to be twice-yearly when bedded in and will always look two years ahead.

Further information on the price cap predictor is available from Anna Moss at