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Ofgem’s price caps

Frosty nights and short days may seem like a distant memory, but one thing we can be sure of, is that they will be back. Over this past winter, news about Ofgem's range of new price caps featured in the headlines on more than one occasion. This blog takes a look at each price cap and explains what they will mean for consumers.

It is apparent that Ofgem are serious about tackling the fundamental issue of fuel poverty, and these price caps are a start to this journey. Yet, there is a long way to go. In CAP's latest Client report it was found that as many as 42% of CAP's clients could not afford to head their home sufficiently, and 13% had energy debts with a previous supplier. There has been a longstanding problem within the energy sector, whereby a large majority of its customers do not engage with the market. In 2017 only 18% of consumers switched their energy supplier according to Ofgem. This in turn means that a high proportion of households are paying more than is necessary for their energy. The concern is that people in financial difficulty, or those with multi-complex needs, are unable to search around for a better deal or switch energy provider.

This is the story of CAP client, Susan.

Susan was raised by her mother and having been born with learning difficulties, she found it hard to get by day-to-day without additional help. She was illiterate and had no access to the internet. Susan really began to struggle when her mother passed away, whom she had depended on for years. Susan was on a prepayment meter (PPM) and did not understand the deductions, every time she put money on the meter, it would disappear. As a result, Susan stopped topping the meter up and proceeded to live without any energy. She had no energy to cook, so she ate cornflakes every day for two years.

Susan was living off benefits and was unable to afford essentials, such as food or even her rent, so she took out payday loans. Enforcement agents started to pursue the debts, the stress from this situation meant that she started to self-harm and even attempted suicide.

At no point during Susan's life would she have been able to search for a cheaper energy tariff, or engage with her supplier. Having suffered from mental ill-health, bereavement and learning difficulties, all these factors played a part in preventing her from proactively looking for a more affordable tariff. It is people like Susan who Ofgem want to support.

Ofgem, the government appointed regulator for the energy industry, have subsequently designed numerous safeguard tariffs to help people engage with the energy industry and to help those unable to pay.

Prepayment meter (PPM) price cap

In April 2017, after a two-year investigation into the energy market by the Competition and Markets Authority (CMA), the PPM price cap was introduced, saving around four million customers up to £75 a year. It was identified by the CMA that those with a PPM were having to pay more for their energy, were unable to fully engage with the market and therefore could not get the best deals. The price cap was designed to match the price paid for customers on standard credit tariffs, which successfully reduced the average cost of a PPM tariff.

Although the PPM price cap was able to reduce the bills for those on PPMs, it did not help those who were struggling with their energy bills who were not on a PPM. As a result, there was a clear need for a wider price cap and Ofgem wanted to move quickly.

Warm Home Discount (WHD) safeguard tariff

In February 2018 the WHD price cap was introduced to the market, which automatically helped one million more consumers. WHD is a government rebate scheme provided by large and medium energy companies, which entitles those on pension credit or in receipt of certain means tested benefits to £140 off their energy bills. In order for the safeguards to be in place before the end of winter 2017/2018, Ofgem needed to use information that was already held by suppliers, which is why having received a WHD payment within the last two winters was used as a proxy.

The issue with using the WHD as a measure for the tariff is that it still requires an element of engagement from the customer, who needs to self-identify each year in order to receive a WHD payment. This means that there will be double the protections in place for those receiving WHD and the price cap, but those so vulnerable they have not been able to self-identify or apply for the WHD are left uncovered. What's more, the WHD is a limited pot, which means that once it has all been allocated, there is no money left for anyone else.

Taking action quickly is important to help the eleven million customers who are unable to afford to heat their homes due to low incomes last winter. In order for broader safeguards to be put in place, more time is needed to implement the changes.

Vulnerable safeguard tariff

Looking ahead to winter 2018/2019, Ofgem have proposed a new price cap for those customers who are on Standard Variable Tariffs (SVTs). Those customers who are in receipt of means tested benefits or disability benefits would receive this new tariff, using data matching with the Department of Work and Pensions (DWP). In order to share this data, new legislation needs to be passed to amend the Digital Economy Act. This safeguard tariff has many benefits, it will be automatic and wide reaching, capturing those disengaged, those who cannot engage and those who can engage but cannot afford to pay more.

The issue, however, is that those customers who are in work will not be able to benefit from this tariff, despite potentially being in equally vulnerable circumstances. CAP recommended that Ofgem consider including those in financial difficulty within the safeguard tariff, for instance those who have energy arrears or are being supported by a Debt Management Charity, to try to close this gap.

Government safeguard tariff

The Government has ambitions to go further and cap the price of all SVTs. This will capture many people who have not engaged with the energy market but can afford to pay more. When this comes in the other tariffs will fall away. However, Ofgem has committed to continue to review the market to ensure that there are still protections for vulnerable people in place.

Although the numerous tariffs and price caps are confusing, it is encouraging to see progress being made both this year and planning ahead for the next five years. Ofgem have been proactive in ensuring that consumers, especially vulnerable consumers, have been treated fairly. CAP will continue to watch as these price caps come into force, helping to ensure that those with the most complex needs are protected.

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