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Millions to see annual energy bills drop as price cap takes effect

Biggest shakeup since privatisation could also see savings lost ‘within months’

Electricity bill and light bulb
The long-awaited ceiling on default tariff energy bills comes into force on 1 January 2019. Photograph: Alamy
The long-awaited ceiling on default tariff energy bills comes into force on 1 January 2019. Photograph: Alamy

Millions of households will see their annual energy bills drop as the government’s price cap takes effect on Tuesday, but experts have warned that the saving will be wiped out within months.

The long-awaited ceiling on default tariffs amounts to the biggest shakeup of the energy market since privatisation. Unlike Ed Miliband’s proposed energy price freeze, the cap is a ceiling that can move up and down twice a year depending on the costs facing energy firms. While energy regulator Ofgem has said 11m households will save £76 a year based on typical consumption, industry watchers think that will soon be offset by a rise in the cap.

Next month the regulator is due to publish an update on the level of the cap from April. Analysts at energy consultancy Cornwall Insight believe this will result in a high single-digit percentage rise on the cap, which comes in on 1 January at £1,137 for a duel fuel bill.

Factors such as rising wholesale costs and renewable energy subsidies are expected to put upward pressure on the cap. A rise of £90, for example, would amount to an 8% increase on the £1,137 cap that Ofgem has set for households with typical energy use. However, some in the industry think the increase could be even worse, because they felt that Ofgem had “deferred some pain” in the first three months of the cap’s life.

Ofgem has calculated that households will collectively save around £1bn from the measure, which will knock 5% off energy firms’ profits. Companies are adopting a range of strategies to adapt to the regulated prices. Some, such as British Gas and E.ON, are pursuing cost-cutting programmes and shedding jobs. British Gas owner Centrica has also launched a legal challenge against Ofgem’s calculations for the cap, though it has said it does not intend to delay the policy.

The big suppliers have also been busily moving customers off default tariffs on to fixed deals instead, which are not covered by the cap. Just over two years ago, British Gas had 67% of its customers on default tariffs, which are usually considered poor value. It now has just 50% on such tariffs.

In the same period, EDF has gone from 52% to 37%, E.ON from 61% to 54.5%, ScottishPower from 41% to 27% and SSE from 71% to 69%. However, npower has increased, from 48% to 53%.

Consumer groups have warned people not to assume that fixed tariffs provide better value, after one analysis found 70 fixed deals that would exceed the cap. Ofgem said consumers would still be better off under the price cap, even if it rises in April as expected.

A spokesperson said: “The price cap means consumers on default tariffs only pay the real costs of supplying energy and these costs are transparent. This means that if the costs go up, any rise will be fair and justified, and if costs go down, the savings will always be passed on to consumers.”

Theresa May said the cap would benefit millions of families that have been “ripped off by energy companies for far too long”.

Referring to an investigation by the competition regulator into overcharging of loyal insurance, broadband and telecoms customers, the prime minister added: “But work to tackle this issue doesn’t stop there. We’re working with regulators and industry to ensure that consumers are not unfairly overcharged in the future – whether on their phone bills or their insurance premiums.”