Ofgem’s energy price cap could shave up to £1 billion off energy companies’ profits, an Ofgem spokesperson has told Mike Graham.
Rob Salter-Church, Director of Retail Systems at Ofgem, said the price cap, which comes into effect on January 1, will halve big suppliers’ profit margins.
“This is a tough cap we’ve set for suppliers - we’ve allowed for a 1.9% profit margin,” said Mr Salter-Church.
“That is about half the current profit margin for suppliers.
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“We are taking a tough stance on suppliers’ profits. The cap we’ve announced is going to take about £1 billion of the profits out of the market.”
Ofgem said the cap was to be initially set at £1,137 per year for a typical dual fuel customer paying by direct debit.
It will save households around £76 per year on average, with those on the most expensive tariffs saving £120.
But Ofgem added it is likely to announce just a month later that the cap will be increased, to take effect in April, after wholesale energy costs have risen "significantly" over the past year and continue at the same pace.
'Customers who switch could save more'
Graham and co-host Georgie Frost quizzed Mr Salter-Church over why the cap wasn’t higher, given that consumers who switch deals could end up saving more than the cap.
“What the price cap does is put in place a backstop protection for customers,” Mr Salter-Church said.
“What we’ve done is look forensically in detail at what it costs to supply gas and electricity.
“What we have concluded is that that [£1,137] is a fair price based on what it costs suppliers.
“What customers who don’t switch get from this cap is confidence that we’ve scrutinised it so it’s no higher than it needs to be to cover the cost.
“It is true if customers switch around and look for a better deal that they may be able to find one. They could save much more than the £76.”
The cap is set to be updated in April and October every year to reflect the latest estimated costs of supplying electricity and gas, including wholesale energy costs.
But Stephen Murray, energy expert at MoneySuperMarket, warned that the cap is "not sustainable".
He said: "The cap will be reviewed again in February, when market forces look likely to dictate it will rise significantly.
"That means we could be looking at three months' gain and then 12-18 months of long-term pain for people who do nothing and let the regulator control their bills."
Ofgem's announcement on the start date comes after it was given legal powers by the Government in July to introduce the cap.
It has already capped bills through its safeguard tariff for four million pre-payment meter households, which was extended in February to one million more vulnerable consumers on poor-value default deals who already received the Government's Warm Home Discount.