- Energy debts and arrears have passed £3bn according to regulator Ofgem
- Firms will be able to charge customers a £28-a-year levy to bail out bad debts
Energy regulator Ofgem has granted energy firms a temporary £28-a-year levy on all home fuel bills to pay for customers who have fallen into massive arrears due to the cost-of-living crisis.
Announcing a 12.3 per cent reduction in the current energy cap to start on April 1, the energy regulator confirmed the additional levy due to arrears reaching more than £3bn – as millions of customers struggle with their bills.
According to Ofgem, the reduction in the price cap will mean that customers on a dual fuel tariff and signed up to a direct debit will see their bills fall by £20 a month.
However, to counter the dramatic increase in arrears and unsustainable debts, the energy firms can recoup £28-a-year from every customer to mitigate against these losses.
An estimated five million customers are in arrears with energy companies. Despite the announced reduction in the price cap, bills for gas and electricity are still 60 per cent higher than they were at the start of the Russian invasion of Ukraine
As a result of the intervention, this will see energy prices hit their lowest level since Russia’s invasion of the Ukraine in February 2022.
Ofgem said the cost of living remains high and many customers continue to struggle with their bills as standing charges rise and energy debt reaches a record figure of £3.1 billion.
Under new plans, Ofgem has abolished the ‘PPM premium’ that was levied against customers with pre-payment meters meaning their energy costs were artificially inflated.
Jonathan Brearley, CEO of Ofgem said on Friday: ‘This is good news to see the price cap drop to its lowest level in more than two years – and to see energy bills for the average household drop by £690 since the peak of the crisis – but there are still big issues that we must tackle head-on to ensure we build a system that’s more resilient for the long term and fairer to customers.
‘That’s why we are levelising standing charges to end the inequity of people with prepayment meters, many of whom are vulnerable and struggling, being charged more up-front for their energy than other customers.
‘We also need to address the risk posed by stubbornly high levels of debt in the system, so we must introduce a temporary payment to help prevent an unsustainable situation leading to higher bills in the future. We’ll be stepping back to look at issues surrounding debt and affordability across market for struggling consumers, which we’ll be announcing soon.
‘These steps highlight the limitations of the current system – we can only move costs around – so we welcome news that the Government is opening the conversation on the future of price regulation, seeking views on how standard energy deals can be made more flexible so customers pay less if using electricity when prices are lower.
‘But longer term we need to think about what more can be done for those who simply cannot afford to pay their energy bills even as prices fall. As we return to something closer to normality we have an opportunity to reset and reframe the energy market to make sure it’s ready to protect customers if prices rise again.’
The £28-a-year bad debt bailout levy will not apply to customers on pre-payment meters.
Another part of the reforms includes the elimination of the ‘PPM premium’ which saw customers on pre payment meters penalised with higher standing charges.
Scrapping this system will save pre-payment customers on average £49 a year, while costing those with other meters an extra £10.
Commenting on the announcement, Citizens Advice chief executive Dame Clare Moriarty said: ‘It’s good news that the cost of energy is falling, but the impact of sky-high prices will be felt for years to come.
‘We know more than five million people live in households behind on their energy bills and, with the price of energy still far higher than just three years ago, many people will struggle to pay off these debts.
‘The Government promised a new plan for energy bill support by April 2024, but will miss its own deadline. And the withdrawal of cost-of-living payments this spring will make it so much harder for many of those already finding it difficult to make ends meet. Without action, people will face a cycle of winter crises year after year.”
Simon Francis, co-ordinator of the End Fuel Poverty Coalition, said: ‘Even after this latest change to the price cap, energy prices remain 60 per cent higher than they were before the energy bills crisis began.
‘Three years of staggering energy bills have placed an unbearable strain on household finances up and down the country. Household energy debt is at record levels, millions of people are living in cold damp homes and children are suffering in mouldy conditions.
‘Everybody can see what is happening in Britain’s broken energy system and it is time for politicians to unite to enact the measures needed to end fuel poverty. This includes cross-party consensus on a long-term plan to help all households upgrade their homes and short-term financial support for households most in need.”
One retailer said high energy bills had led to a 400 per cent spike in demand for its heated blankets in December compared to the previous year.
Snugel founder Johanna Lueders said she was inspired to launch the brand after seeing the increasing number of ‘warm banks’ opening due to a rising need for places for people to go to warm up.
She said: ‘Consumers have turned to other sources of warmth. The reality is that the average energy bill soared from £1,971 to £3,549 in a year, and now we have found that people are looking at personal heating solutions like heated blankets and hot water bottles to heat the person, and not the home.
‘Sadly, this isn’t just a lifestyle shift – it’s a survival tactic in the face of soaring costs.’