Ofgem’s price cap means winter will be less painful than last but poorest could end up paying more
Ofgem’s latest announcement appears to offer some respite, but it is better off customers that stand to benefit, while poorer households could end up paying more.
The regulator has lowered the price cap, meaning a typical household will see their annual bills fall from £2,053 to £1,923.
It’s a move in the right direction but the extra cash will quickly be absorbed by higher housing and grocery bills: monthly mortgage payments have spiked as interest rates continue to climb and food prices are rising at an annual rate of 14.9%.
The new level is also much higher than it was in October 2021, before Russia’s invasion of Ukraine precipitated a global energy crisis.
Back then, the price cap came in at £1,277.
It peaked at £4,279 in January, although government support limited the damage.
Ofgem said households are reducing their energy usage in response to higher bills – by around 7% per year for electricity and 4% per year for gas. Under this new weighting, the price cap would actually come in at £1,823.
So, across the board, this winter will be less painful than the last.
However, with energy bills still far above pre-crisis levels at a time when housing and food costs are rising, the financial constraints on households are considerable.
Poorer families will be the worst hit.
Not only do they spend a larger proportion of their disposable income on essentials, like energy and food, but the composition of the price cap also hurts them disproportionately.
That is because, although unit prices for gas and electricity have come down, the daily standing charge that customers pay has been rising.
This is the fixed cost that customers pay to have their homes connected to the grid.
These costs have climbed over the last few years, partly because they also include supplier failure costs – around 30 suppliers have gone bust since energy prices started to rise in 2021.
As this is a fixed cost there is no advantage in lowering your household energy usage.
Even those that use very little gas and electricity will have to pay it, meaning the system disproportionately benefits wealthier families with bigger homes.
According to the Resolution Foundation, a left-leaning thinktank, the surge in standing charges – along with the withdrawal of some government support packages – means more than one-in-three households (7.2 million) across England will pay higher energy bills this winter than last winter.
“As a result, the biggest falls in bills will be seen by households who use the most energy – while households who consume relatively little energy will face higher energy bills this winter than last” the Resolution Foundation said.
It said that the government’s policy of offering cost of living payments totalling £900 to around eight million of the poorest households would struggle to make a dent in the problem.
“The rising cost of other essentials – such as food bills, which are up by £960 on average since 2019-20 – mean this is unlikely to stop another winter of financial hardship,” it said.
“The 2.3 million families in the poorest fifth of households who don’t receive benefits – and are therefore unlikely to be eligible for cost of living payments – could be hit hardest.”