Ofgem announces price caps for pre-payment customers

Ofgem has published gas and electricity price caps for customers using pre-payment meters.

The caps apply to electricity and gas and vary between regions (because network charges vary) and between types of meter (eg for those on Economy 7 tariffs).

Ofgem says the cap will mean ‘significant reductions’ in gas tariffs for 3.5 million households (15% of all gas customers), saying “for most of the large suppliers, we expect these reductions to be around 10-15%”. It estimated the saving would be around £80 a year for a typical prepayment gas customer. It said around 650,000 Economy 7 electricity customers would see a similar reduction over the year. (Although the caps will be revised in August, before the winter heating period.)

Electricity customers with pre-payment meters who are not on the Economy 7 tariff (around 4.5 million households, representing 17& of domestic accounts) are less likely to see bills fall. “In many cases, the cap will not require suppliers to make any reductions to their electricity prepayment tariffs for those customers with standard, single-rate meters. The indices of electricity costs used to calculate the cap have risen since the CMA benchmark was set in 2015, while electricity prices have generally remained flat,” said Ofgem.

The cap is a measure required by the Competition and Markets Authority, which concluded in its recent investigation into the domestic energy market that customers with pre-payment meters were suffering the most detriment from lack of competition in the energy market.

The first cap will apply between 1 April and 31 September, and it will be updated six-monthly by Ofgem until the end of 2020.  The cap for 1 October to 31 March 2018 will be determined in August.

In a note on the implications of the price cap Lakis Anathasiou, utilities analyst at Agency Partners, said it would take some of the political heat out of other tariff changes. The note said, “We anticipate that the announced PPM tariff caps will indicate required increases of 4% from current electricity PPM tariffs, although with a 13% cut in gas PPM tariffs.

“The electricity price increase will legitimise required increases in the electricity Standard Variable Tariff”. Balanced with anticipated gas SVT cuts, the result would be “to reduce political risk in residential supply”, he said.