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Government energy price cap to raise bills for millions of vulnerable customers

Jillian Ambrose
The total number of households protected on the tariff will be more than five million, Ofgem said - ANDY RAIN

The energy regulator’s plan to cap household tariffs threatens to strangle the retail market by slashing profit margins and limiting competition to within a range of just £29 a year on an average bill, say critics.

The regulator laid out its plans to extend the so-called “safeguard tariff” from four million homes which use pre-pay meters to include another one million vulnerable customers who qualify for government help with their bills.

But its calculations have reignited criticism of the plan which Government hopes to roll across all standard tariffs by the end of the year.

Under the plans, Ofgem will allow the safeguard tariff to cover supply costs but allow an average profit margin of just 1.25pc, less than a third of the regulator’s latest annual estimates, which averaged 4.5pc in 2016.

To ensure that suppliers can remain competitive Ofgem will also add “headroom” of £29 a year which it expects suppliers to use to offer tariffs below the cap.

The Government hopes to roll out the safeguard tariff across 11m more households which use standard tariffs before the end of the year. Critics of the plan claim that policymakers’ most severe intervention in the energy market since privatisation will stifle competition, drive away investors, and offer very little benefit for consumers in the long run.

Ofgem said rising costs have forced its safeguard tariff higher Credit: Ofgem

Already Ofgem has admitted that it will need to hike the safeguard tariff by £57 a year, meaning customer savings will halve from what Ofgem promised the most vulnerable customers only four months ago. The regulator said in October that vulnerable energy customers could expect to save £120 a year on their bills through the price cap.

But the promised savings have already fallen to £115 a year. Once the rise takes effect in April, the savings dwindle to just £66 a year.

The safeguard tariff was supposed to protect consumers against unfair energy tariff hikes which suppliers blame on the increasing cost of meeting Government policy schemes and buying their energy through the rising wholesale market.

But Ofgem admitted the same costs are driving their safeguard tariff higher too. The move could also prompt energy suppliers to follow suit, meaning higher prices for customers across the market.