New price cap for prepay energy customers

Ofgem, the UK's energy regulator, has set a temporary price cap for prepay energy customers, designed "to protect over four million households least able to benefit from competition" and save those customers around £80 per year.

Competition concerns

The cap is set to come into force in April this year, and is the result of a two-year investigation into competition in the energy market. In a nutshell, it was found that competition was insufficient, particularly for prepayment customers, who are often denied the best deals and are in the most vulnerable circumstances.

The Competition and Markets Authority (CMA) said that customers with a prepayment meter "face particularly high levels of detriment", with competition between suppliers for such customers being "less developed than for those who pay by direct debit, cash or cheque". This means that there are fewer tariffs available to these customers, and the tariffs that are available are generally more expensive, so the regulator is stepping in to help.

Temporary measures

The cap will initially apply to over four million households who prepay for their energy, said Ofgem, typically those with traditional prepayment meters, as these customers are among those least able to benefit from competition.

The levels of the cap will vary for electricity and gas, as well as by meter type and region, but Ofgem estimates that typical prepayment customers could see their gas bill reduce by around 10-15%, thereby saving approximately £80 a year, based on average consumption. Prepayment customers who use electricity to heat their home (such as those on Economy 7 meters) could also reap the benefits and potentially see their electricity bills fall by the same £80 a year (approximately).

The cap is due to expire at the end of 2020, when the rollout of smart meters is set to be completed. This should ensure that everyone, but prepayment meter customers in particular, can access better deals, so it's hoped that by then, the price cap will no longer be necessary.

Dermot Nolan, chief executive of Ofgem, commented: "We want all consumers to enjoy the benefits of a more competitive energy market, regardless of their circumstances. Customers who prepay for their energy are denied the best deals on the market available to those using other payment methods. They are also more likely to be in vulnerable circumstances, including fuel poverty. This temporary cap will protect these households as we work to deliver a more competitive, fairer and smarter market for all consumers."

Will I benefit?

If you use a prepayment system for your gas and electricity, then it's likely that the price cap will be of benefit – but if you can, you could save far more by opting for a different payment method. Figures show that prepayment customers typically pay as much as £220 more than those on the cheapest deals on the market, so switch if you can.