£19 saving isn't enough for prepay energy customers

Credit: Jonathan Fussell/Shutterstock.com

The cap saved prepay energy customers as much as £80 when it was introduced on April 1st, at a time when said customers were paying as much as £1,157 a year for their electricity and gas.

Given that the highest dual-fuel standard variable tariff (SVT) of the Big Six providers is currently £1,186 per year (belonging to npower), and given that as many as 54% of prepayment energy customers self-disconnect, it's understandable that Ofgem acted to limit the financial burden being placed on these customers.

However, while the new adjustment to the cap will help prepayment customers avoid particularly steep charges, it needs to be accompanied by major investment in the UK's energy supply if long term costs are to be kept down.

Updating the cap

Still, at the very least, the prepayment cap has seen some modest success, insofar as its introduction in April served to make prepay energy prices cheaper on average than those for SVT customers paying via Direct Debit.

Source: Ofgem

As the above graph shows, the SVT average as of this June was £1,115.96, while the prepay average was £1,049.86.

Yet as Ofgem's announcement suggests, things aren't stopping there, since the regulator has "updated" the prepay cap's level, which they expect could save customers an average of £19 a year.

In fact, they may do this again in six months time, since the cap's conditions involve Ofgem reviewing the costs of suppliers every half a year.

If the wholesale price of energy decreases in the next six months, then, Ofgem will lower the cap even further.

Of course, this approach is good news for customers insofar as it will prevent energy providers from making excessive profits, something which has frequently been claimed they do.

However, it's powerless to stop prices for prepay customers from rising in the event that wholesale costs rise, something which suggests that rather than simply capping prepayment costs, Ofgem and the Government need to focus more on strengthening the UK's energy supply.

In other words, the UK needs to invest more in its own renewable or carbon-free energy sources, thereby bringing wholesale costs down to the point where energy prices are more reasonable.

Debt and choice

Otherwise, the successes of the prepay cap and any future caps like it will be limited.

And as things stand, the benefits of the current prepay cap are already limited enough, in that even the capped level of prepayment energy charges is still too high.

For example, while average annual prepay energy costs currently stand at £1,049.86, the average annual cost of the cheapest fixed tariffs is £849.74.

This is a £200 yearly difference, and what makes it particularly pernicious is that prepay customers are more likely to be the kind of people not in position to drive a better bargain for themselves or shop around.

On the one hand, half a million (or 11.1%) of the 4.5 million customers prepaying for their energy have prepay meters because they're in debt with their energy supplier, meaning that they aren't actually able to switch to a better tariff until their repay their debts.

On the other hand, for those who use prepay meters more "by choice" (or rather, because their income isn't stable enough to cover energy paid via Direct Debit), their ability to switch is hampered by the fact that competition in the prepay tariff market is severely limited.

As the Competition and Markets Authority concluded in their 2016 review of the energy market, "We find that the range of tariffs available to prepayment customers is significantly more limited than those available in the credit meter segments".

Because of these limitations on prepayment customers, the considerably greater expense of prepay tariffs can't help but seem particularly unjust, with the levying of higher charges by energy providers coming across as a kind of perverse surcharge on misfortune or relative poverty.

Temporariness and investment

Yet perhaps the most unfortunate detail surrounding the cap is its temporariness. It will end in 2020, under the assumption that Ofgem and the Government will have somehow found a way to keep prepay charges down by then.

However, if Ofgem's work in limiting how much providers can charge until 2020 isn't matched by comparable or greater efforts to invest in the UK's energy supply, then customers - and not just prepay customers - will see that costs remain hovering around their expensive current level.