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Ofgem energy price cap: why gas and electricity prices limit needs to be scrapped to get energy bills down

The Ofgem energy price cap is set to fall slightly from October 2023 (images: Getty Images/Adobe)
The Ofgem energy price cap is set to fall slightly from October 2023 (images: Getty Images/Adobe)

There was a morsel of good news for households across Great Britain on Friday (25 August), as Ofgem revealed the energy price cap would fall to £1,923 for a typical household.

The £151 (7%) drop on the previous limit means bills will fall to their lowest level since March 2022. While any good news should be welcomed, especially in these challenging times, the energy regulator’s announcement will only make a tiny difference to your bills. The average home will be just £12.58 a month cheaper to run from 1 October.

Another crucial thing to note is that these prices are still nowhere near where they used to be. In 2019, before Covid and the energy crisis struck, a typical annual energy bill for a typical home stood at around £1,100. The new price cap is now 75% dearer.

Energy bills are significantly above where they were before the energy crisis (image: PA)
Energy bills are significantly above where they were before the energy crisis (image: PA)

As it stands, our energy outgoings are unlikely to return to anything like those prices for the foreseeable future. According to Cornwall Insight, the energy consultancy that has accurately predicted the price cap throughout the last two years, energy bills will be significantly above pre-2021 levels until at least 2030. The organisation reckons the price cap will now hover close to its current level until late 2024.

In short, the pinch from your gas and electricity bills is here to stay. So, it was pretty astonishing to hear energy minister Andrew Bowie tell Sky News that “the price cap has yielded hugely positive results for the British people”. I’d wager the estimated 6.6 million households in fuel poverty would disagree.

Set up by Theresa May’s government in 2017, the Ofgem cap was never intended to serve the purpose it currently does. The idea was to protect bill payers on default variable tariffs - who were also more likely to be vulnerable - by setting a limit on what providers could charge them. The rest of the market was served by cheaper fixed rate deals.

A scenario like the one we have seen - where prices shot up so rapidly that energy suppliers either went bust or could no longer compete with the price cap rate - was never envisaged. But here we all are, caught in a well-intentioned safety net that offers little chance of escape anytime soon.

Rather than wasting its own time pretending everything’s fine, the government needs to explore alternatives - and fast. Energy experts and voices from across the political spectrum are urging the government to scrap the price cap - even Ofgem wants rid of it.

This winter, many of us will be paying more for our energy because - as it stands - there will be no government support scheme to replace last year’s £400 payout. According to analysis by progressive think tank the Resolution Foundation, almost a quarter of the poorest tenth of families will see their bills rise by £100 or more compared to the winter of 2022/23. These households tend to live in less energy efficient homes and, therefore, spend a greater proportion of their incomes on gas and electricity. They may be stretched to breaking point this winter.

One idea everyone appears to be united behind is the introduction of a social tariff for these vulnerable households. This targeted support would not cost the public purse anything like what the energy price guarantee did, but it would help to keep the most vulnerable in society solvent, healthier and happier - three things that could actually save the Treasury cash in the long term as they would be likely to reduce pressure on the NHS.

Removing the price cap could also reduce energy bills for everyone else. A recent report from the centre-right think tank the Centre for Policy Studies (CPS) argued providers “are being actively discouraged from offering new, more affordable deals” because “competition has all but disappeared”. It said this lack of competition stems from the energy crisis changing the Ofgem cap “from a genuine cap to a state price control for virtually the entire market”.

Of course, the price cap is not the only reason why we’re in this position. Energy is so expensive because wholesale costs have soared over the last two years.

A global rush for gas after Covid-19 and the Russia-Ukraine war have been especially damaging to the gas import-dependent UK. With Russian exports off the menu, the UK is having to compete with more countries than it used to for a smaller pool of gas - a situation that will keep prices inflated.

But the UK is not the hostage to fortune the government claims it is. Even with wholesale costs tracking much higher than they used to, the state could help us all slash our energy usage - and therefore, our bills.

By taking money out of unnecessary, polluting projects - like the Stonehenge tunnel - or spurious ‘green’ projects - such as carbon capture - and redirecting it into meaningful grants for home insulation and green heating schemes, the country would not only find itself closer to its net zero targets but it would also be less exposed to the international price shocks associated with fossil fuels.

Failure to act now will not only leave the least well off in society freezing in their homes, but it could freeze the Conservatives out of power for years. Judging by Andrew Bowie’s ill-judged comments, the government doesn’t get it.