After 18 months of turbulence, has an energy giant paved the way for a new price war?

For the past year and a half, the advice on energy bills has been clear: don’t switch providers. It goes against everything we’ve been told for the last 20 years – when switching providers regularly was the only way to ensure we weren’t paying too much.

Skyrocketing wholesale gas prices meant that suppliers such as British Gas, Octopus and Ovo were no longer able to offer cheap deals to attract new customers. Instead, the so-called standard tariffs, in which everyone who has not switched in the past year ends up, were actually the cheapest for the first time due to the price cap.

And while it seemed like the bills would never go down again, the feeling now isn’t if they will go down, but how fast.

Last week, Ovo introduced the first tariff below the government’s cap since the energy industry collapsed in winter 2021. So what does this news mean for hard-pressed Britons? And is it finally time to think about a change?

What was the deal before the energy crisis?

Providers such as British Gas, E.ON and EDF offered the best deals to attract new customers. The profit margins were small, but after a year the tariff switched to a more expensive standard tariff. It’s a common business model, also used by broadband providers and insurers – luring customers in with a cheap offer and hoping that they’ll stay when prices go up. Most agree it’s not fair to loyal customers. But it meant savvy Brits willing to switch suppliers could get the most competitive prices on gas and electricity.

What happened to alert the situation?

That all changed at the start of winter 2021. Soaring wholesale prices – which had increased sixfold this year after post-lockdown demand surged – prompted retail suppliers to stop offering cheap deals to attract new customers.

In a volatile market where prices could double in a week, this was too risky for vendors. Within a few months, 28 suppliers went bankrupt.

Putin’s invasion of Ukraine in 2022 made the market more volatile. A cut in supply following the surge in demand last year caused wholesale prices to rise even further.

Contrary to previous advice, consumer experts such as Martin Lewis and Citizens Advice urged families not to switch providers. Because the standard tariffs, the prices of which are based on the upper energy price limit, were cheaper than all the new offers for the first time.

In October 2021, the cap was £1,277, then the highest in ten years. The best new offers were around £1,600 and most around £2,000. Experts said these companies were pricing themselves out of the market because they didn’t want to take on new customers. Thereafter, tariffs increased to just under £2,000 in April 2022 and then to £2,500 from October (although they would have been much higher had the government not set this limit).

What has changed lately?

Last week, Ovo introduced a tariff that is cheaper than the government’s cap on household bills. It’s only for its existing customers, but it’s expected to open and other suppliers are inclined to follow suit. Ovo is offering existing customers a one-year fixed rate of £2,275, which beats the Government’s Energy Price Guarantee (EPG).

Wait a minute… what is the EPG?

The EPG was introduced to keep bills below the much higher level they would normally be below Ofgem’s price cap. It is a short-term measure, just as long as wholesale prices are high. Put simply, it ensures that a typical family pays no more than £2,500 a year.

I’m confused. What is the Ofgem price gap?

Ofgem’s price cap has been replaced by the EPG. The cap sets tariffs based on market price, meaning they’re £3,280 a year for typical users due to record high wholesale prices since yesterday. In the last three months it was £4,279 – the highest ever.

The EPG protected customers from these historic highs and kept bills at £2,500. Once the price cap falls below the EPG – it’s estimated to go to around £2,000 from July – customers will pay whichever is lowest.

What should the experts do?

Martin Lewis, founder of finance website Money Saving Expert, said: “People have to be very careful not to just jump on a solution because it costs less than they’re paying now. If you are on a standard fare, there is a cap on the fares you pay. This upper limit is currently set by the energy price guarantee and will remain roughly stable until the end of June.

“As wholesale tariffs — the tariffs energy companies pay — have come down thereafter, the cap is likely to come down, and current projections mean you’ll start paying 20 percent lower rates than you do now.”

He said the price is expected to “remain around this point” through the end of the year and into 2024.

Will other suppliers follow Ovo’s example?

Uswitch Energy Expert Ben Gallizzi said: “The deal offered by Ovo Energy is a great first step towards resuming a competitive energy market.

“We believe that other providers should follow suit, with most existing customers initially offering fixed contracts.

‘We hope this will encourage the industry to offer competitive tariffs to all households in the coming weeks to quickly return to full-scale switching.

“The price of these fixed contracts will initially be higher than what people have been used to in the past, but the early signs of a return to a competitive energy market are encouraging news and should eventually lead to cost reductions.

“Our analysis suggests that suppliers could currently offer fixed offers costing the average household between £2,200 and £2,500 a year. With energy prices forecast to fall in July, some providers may offer better tariffs to attract new customers as we approach summer.’

So can we expect prices to fall further?

Experts predict household bills will fall this summer as suppliers sign new long-term deals to buy cheaper gas.

At that point the government EPG, which will be updated until the end of June, will no longer be needed.

Last month, analysts at Cornwall Insight predicted Ofgem’s energy price cap would fall to £2,153 a year from July.

And last week, analysts at financial firm Investec said the cap could drop to £1,981 a year from July – although that would still be significantly higher than before the Russian invasion of Ukraine.

So finally…

Wait for the July price cap to be announced. The cap could be lowered to around £2,000 and if suppliers think wholesale prices will fall further they will offer fixed year contracts for less.