Cheaper fixed rate energy tariffs could return as price cap predictions stabilise

The predictions for the Default Tariff Cap in this piece are out of date please click HERE to find our most up to date forecasts.

Cornwall Insight’s price cap projections have shifted just £38 since March, with a typical household now predicted to pay approximately £2,060 per year from July. The stabilisation of the forecasts reflects the decreased volatility in the wholesale energy market, with the relatively mild winter, higher than-predicted European storage levels and reduced demand from consumers, lowering concerns over supply.

If wholesale prices remain less volatile, it is thought an increasing number of energy suppliers could be prompted to introduce fixed-rate tariffs aligned with or close to the price cap, as they become less apprehensive about the possibility of a sudden surge in energy prices.

Cornwall Insight employs the Ofgem methodology to forecast the price cap, using current wholesale gas and electricity market prices along with our assessment of non-wholesale bill components. As the wholesale element constitutes a significant portion of the bill, predictions stabilise when the market stabilises.

Our Q3 2023 (Jul-Sept) predictions have remained relatively stable since the end of February, fluctuating by around £100 over the past two months¹. This is compared to predictions at the start of the year which moved by over £600² from January to mid-February as the wholesale market shifted. The predictions for Q4 2023 (Oct-Dec) and Q1 2024 (Jan-Mar) show – all things remaining equal – the cap is expected to stay relatively steady into the first part of 2024 and likely beyond.

An increase in fixed-rate deals entering the market could help consumers get greater control over their energy bills, confident their price per MWh will not increase over the term. While this may be seen as a good development, there is always a risk in fixing energy tariffs as bills may reduce further leaving customers locked in at higher-than-market rates for a fixed duration. Additionally, we must recognise these prices are still £1,000 more than households were paying prior to the pandemic.

Several industry consultations and calls for evidence on different components of price cap modelling could impact the cap’s level and structure. While these uncertainties are not expected to materially impact the Q3 cap, they could affect the cap level from Q4 and beyond, meaning our forecasts may change – however, we will not have clarity on these until later in the year.

Figure 1: Cornwall Insight’s Default tariff cap forecasts including VAT (dual fuel, direct debit customer, national average figures)

Figure 2: Default Tariff Price cap forecasts, Per Unit Cost and Standing Charge including VAT (dual fuel, direct debit customer, national average figures)

Dr Craig Lowrey, Principal Consultant, Cornwall Insight:

As the wholesale energy market has levelled out in recent weeks, our predictions for the price cap have followed suit. Some energy suppliers will potentially look to leverage this opportunity to bring back fixed tariffs on or around the price cap, with stable projections lowering concerns they will lose out over the fixed term. This potential re-emergence of competitive tariff propositions presents an opportunity for households to finally get a grip on their energy bills, having been hit hard by the energy crisis. While this seems positive, fixing energy tariffs is a gamble, the market may go down as well as up, and households run the risk of getting locked into bills higher than the price cap.

We are faced with several uncertainties as we look beyond the July price cap, with ongoing consultations on the cap modelling and other legislative changes that could potentially bring significant changes. This leaves our predictions for the end of this year and beyond potentially vulnerable to change.

What we do know is while energy bills may begin to stabilise, they are still far from returning to pre-2020 levels. While consumers may feel more secure, we must not underestimate the fact that these bills remain unaffordable for many households. The global energy market and our heavy dependence on energy imports still impact bills. Moreover, unforeseen geopolitical events can easily disrupt the wholesale market again. It is crucial that the UK accelerates its journey towards energy self-sufficiency. Only by reducing our reliance on imported energy can we gain the confidence that bills will remain stable in the long term.”

Want to keep up to date with Cornwall Insight’s price cap predictions? You’ll be glad to know that Cornwall Insight has recently launched a dedicated webpage that will be regularly updated with our released predictions. This page also offers helpful answers to frequently asked questions about the price cap. Don’t miss out on this valuable resource – check out the page today: Predictions and Insights into the Default Tariff Cap

Reference:

1. Released Q3 predictions for a typical dual fuel energy bill from the end of February to the end of March:

31/03: £2,024.58

15/03: £2,000.62

27/02: £2,112.42

• Released Q3 predictions for a typical dual fuel energy bill in January:

20/02: £2,153.34

06/02: £2,361.98

19/01: £2,201.46

04/01: £2,800.16

Ends

Notes to Editors

For more information, please contact: Verity Sinclair at v.sinclair@cornwall-insight.com

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About the Cornwall Insight Group

Cornwall Insight is the pre-eminent provider of research, analysis, consulting and training to businesses and stakeholders engaged in the Australian, Great British, and Irish energy markets. To support our customers, we leverage a powerful combination of analytical capability, a detailed appreciation of regulation codes and policy frameworks, and a practical understanding of how markets function.