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2019

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How low can you go? The price cap to fall by £77/year

Charlotte Farmer
Charlotte Farmer Analyst

Just over two months after the default tariff cap was increased for summer 2019, our thoughts have turned to Ofgem’s 1 October winter 2019-20 adjustment to the cap. The start of May marked the start of the second half of the data window for wholesale costs in the cap formulas.

Forecasts from our latest Tariff Cap Predictor show that there is likely to be a significant reduction to the default tariff cap in the winter 2019-20 period. Based on wholesale prices between February and April 2019, our models predict a possible fall in the default tariff cap by the equivalent of £77/year from its current level of £1,254 (for direct debit customers). This decrease would reverse two-thirds of the rise made by Ofgem in April.

The drop is mostly a reflection of the substantial price reductions in the wholesale market since 1 February, with most of the changes driven by lower quarterly gas prices. For example, Q319 was trading at 49.0p/th on 31 January, while the same contract at the end of April was trading 25% lower at 36.8p/th.

While wholesale costs constitute a large proportion of the falling forecast, there are other influences that have added to the deflationary effect – reduced VAT, lower rates of inflation and smart meter costs.

Ofgem will confirm the new default tariff cap levels in August, and the final figures will depend heavily on the wholesale prices between now and the end of July.

With the cap seemingly on a downward path for the winter season, it will be an unusual situation for suppliers and customers alike, with tariffs affected by the cap set to fall as the colder months roll in. This is likely to be a significant challenge for suppliers, many of whom have already voiced concerns over the default tariff cap.

Our Tariff Cap Predictor forecasts Ofgem’s safeguard tariff and the government’s default tariff cap utilising tariff models and Cornwall Insight’s forecasts of industry and other costs. The predictor looks two years ahead and is updated each time Ofgem sets a new level for the safeguard tariff or default tariff cap. Please contact c.farmer@cornwall-insight.com for further information.

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