Price cap rising today but is predicted to fall in October

Today, Ofgem announced the price cap will increase by £117 to £1,254. Cornwall Insight’s tariff cap predictor (graph below) was forecasting a new cap level of £1,250 back in November 2018 only £4 out.

However, with wholesale cost pressure starting to fall Cornwall Insight’s early predictions for winter 2019 show that the price cap is likely to decrease by around £50*, assuming wholesale costs remain at the same level the market experienced at the end of January.

A graph showing confirmed and foretasted price cap

Robert Buckley, Head of Retail and Relationship Development at Cornwall Insight, said:

“Today’s announcement comes as little surprise because built into the price cap design was the possibility of upwards movement in response to changing market conditions. The industry knew the cap would be rising it was just a question of how much.

“Despite the upward movement in the cap, wholesale prices have been falling recently and this could impact the next change to the cap. Should such a trend continue, forecasts from Cornwall Insight show that almost half* of the increase arising from today’s announcement could be erased in the October readjustment.

“Currently, most of the competitive tariffs are priced around £200 to £250 below the new level of the cap. This has seen the gap between the lowest tariffs in the market and price cap almost doubled since the cap’s launch in January. This gap has been partly driven by falling wholesale costs with some suppliers reacting quickly and lowering their prices.

“Today, we suspect suppliers will be considering their commercial strategies and assessing if, when and by how much they start to respond through tariff reductions if falling wholesale cost trends continue, or whether they need to price towards the raised cap. Clearly, this will also be a competitive consideration, given there are suppliers that are already priced well below the cap and switching is at record levels.

“The decision is not straightforward. Fragile balance sheets, varying hedging strategies, and rising policy and network costs mean there is no one-size fits all answer. What is clear is that for all suppliers, the evidence of recent losses and failures shows the stakes are high for all.”


Notes to Editors

*This is an early forecast and assumes wholesale costs will remain at the same level seen in January.