Price Cap falls again to £1,568 - and more changes are coming

Ofgem’s headline Price Cap has decreased by £122 (7%) in today’s announcement (24 May), falling to its lowest level since October 2021, at £1,568 for a typical Direct Debit customer.

However, we know this isn’t a real bill value that customers experience.

Key points:

• Customers could expect to spend £1,674 over 12 months from 01 July 24, a £189 (10%) drop compared to the previous 12m to 30 June 24
• Direct Debit Adequacy calculations are now more stable for suppliers to manage, with flatter wholesale market driving a flatter Price Cap outlook
• Suppliers are preparing for an evolution in the make-up of the Price Cap
• Falling bills will continue to contribute to lower inflation, but there are drawbacks to using the headline Price Cap in the Consumer Price Index

12-month bills to drop 10%, but Price Cap increasing again from Q4-24

Ofgem have announced a third consecutive fall in the headline Price Cap from July, decreasing by £122 (7%) to £1,568 compared to Q2-24 – the lowest level since the October 21 to March 22 cap period.

Based on our demand-weighted projections, customers can expect to spend £1,674 in the 12-months from 01 July – representing a £189 (10%) fall compared to the 12-months to 30 June 24.

This reflects our projection that the Price Cap will rise back up to ~£1,690 from October 24, remaining at this level (similar to the Price Cap seen in Q2-24) throughout the higher-demand periods of Q4-24 and Q1-25. This assumes wholesale prices remain broadly flat.

Due to the continuation of levelisation between payment methods, the latest Price Cap means Prepayment customers continue to pay the least (£1,611), with Standard Credit customers paying the most (£1,761) over the 12 months from July 24.

After accounting for the fact that Q3 is historically the lowest consuming quarter, typical Direct Debit customers will save £50 (compared to the same time last year), rather than £122 as suggested in the headline Price Cap.

More stability for Direct Debit Adequacy calculations in flatter market

As the wholesale market becomes increasingly flatter, driving a flatter outlook for the Price Cap, there’s a feeling of stability emerging for suppliers and customers.

We’re expecting this to be most evident in Direct Debit (DD) payments, with suppliers being able to manage DD adequacy calculations more steadily, providing relief after record-high DD failures in 23-24.

Based on medium consumption levels, modelled DD payments from 12-months ago show a fall from £225 per month to £145 per month in today’s market.

We’re optimistic that with less volatility in DD calculations and journeys, suppliers will face reduced contact rates, with complaints also expected to ease off.

Ofgem's review of allowances could materially impact future Price Caps

Standing charges have remained the same from April (£334), but due to falling bill values, these charges now make up a greater share of bills (21% for the typical medium consumer). This means standing charges continue to have the biggest impact on low consumers – making up ~29% of their bill.

This looks set to change in the long-term, as Ofgem considers moving costs to the unit rate to support low consumers, also contemplating how suppliers can be encouraged to innovate on their standing charges.

Ofgem are completing a broad review of Price Cap allowances – which seeks to make sure costs are captured accurately whilst maintaining some degree of flexibility. This will likely include introducing further levelisation (reallocating debt-related costs between payment methods), as well as potential changes to the benchmarking of core operating costs. This is creating uncertainty for suppliers as to how they’ll be impacted – an area we’re actively engaging with the market on.

If Ofgem favour more stringent benchmarks (incentivising supplier efficiency), this would have a significant impact on suppliers’ ability to absorb unexpected costs.

With views also being gathered on updating the Price Cap to work in a dynamic retail market, future Price Caps could evolve to accommodate changes like Market Wide Half-Hourly Settlements, as Ofgem looks to make sure suppliers can cover efficient costs while protecting customers.

Falling bills will continue to contribute to lower inflation, but customers experience it in different ways

This week saw energy prices continue to contribute to falls in the official rate of inflation. July’s Price Cap reduction will feed through to the inflation rate later this year – having a deflationary effect.

However, we’ve highlighted some drawbacks in the use of headline Price Cap in the ONS Consumer Price Index, as it doesn’t reflect the reality of what most customers are actually spending on energy, and when they’ll see a change in bill value. This strongly depends on the timing of their consumption, and their payment method.

Today's announcement adds another interesting angle to this insight, which you can revisit here.

Contact Tom Bromwich for more on the impact of future market projections, and the broader changes facing suppliers due to Ofgem’s proposed plans.