Recommendation 16

HM Government Acknowledged

The Government believes that all consumers should pay a fair price for their energy. The Energy Price Cap was introduced in January 2019 to protect households on standard variable (default) tariffs from excessive prices. This followed findings published by the Competition and Markets Authority in 2016, after a two-year investigation into the energy market, which found evidence of a ‘loyalty penalty’ whereby customers who remained on default tariffs were paying more for their energy than customers who engaged with the market. The Cap was established under the Domestic Gas and Electricity (Tariff Cap) Act 2018, which requires Ofgem to set a cap on default tariffs to ensure fair pricing for households on default tariffs. The legislation also requires Ofgem to set the cap at a level which allows an efficient supplier to recover all reasonable costs in a timely manner. The legislation also sets out that Ofgem, as the independent regulator, is solely responsible for the setting of the Price Cap. Different payment methods carry varying administrative costs for energy suppliers. To account for this, Ofgem sets separate cap levels for different payment methods to allow suppliers to recover their expenses. Historically, Direct Debit has the lowest cap because the billing process is automated and there is a lower risk of customers not paying their bill. This reduces the billing and administrative costs incurred by suppliers, making it the most cost-efficient option. However, following action to levelise the costs paid by Pre Payment Meter (PPM) customers with those on Direct Debit, PPM customers now have the lowest cap. The costs paid by the cap level for standard credit is higher because this payment method involves greater administrative costs and financial risk, because it has the effect of requiring suppliers to finance debts on an ongoing basis. Ofgem reflects these factors into the Price Cap by setting a higher allowance for standard credit customers, to ensure that suppliers can recover the additional costs. As the Committee noted, Ofgem previously set a higher cap level for prepayment meter customers due to higher costs incurred to suppliers to service these customers. In response to concerns about the impact on vulnerable households who often use prepayment meters, Ofgem implemented a levelisation allowance into the Price Cap which equalised standing charges between Direct Debit and prepayment meter customers. Given the higher costs of standard credit, levelising standard credit costs would very likely have a significant impact on the bills of those consumers who pay by other methods, including vulnerable consumers who pay via direct debit or have a prepayment meter. The Government recognises the concerns raised around inclusion in the retail market. This is why the Government included a commitment in the Clean Flexibility Roadmap (published in July 2025) to develop measures focussed on barriers to the participation of low-income and vulnerable consumers in using energy flexibly. We anticipate that flexible energy usage will benefit all consumers due to reduced system costs. Therefore, while consumers who directly participate can make savings on their bill, their participation will offset costs for other consumers. Additionally, the Government has consulted on a new policy framework to drive greater smart meter adoption by the end of 2030. Smart Energy GB has also been given a statutory responsibility to assist consumers with low incomes, prepayment meters or who may encounter additional barriers, to realise the benefits of smart meters. The energy shocks of recent years have shown the urgent need to upgrade British homes. The Government’s Warm Homes Plan will focus on ensuring homes are more comfortable to live in and cheaper to heat. Through the Warm Homes Plan, we will help households take up measures like solar panels, heat pumps, home batteries, and insulation, helping them save money on their bills and benefit from cleaner, cheaper heating. The Warm Homes Plan represents the biggest ever public investment in home upgrades. At the Autumn Budget, the Chancellor announced an additional £1.5 billion of funding for the Warm Homes Plan, bringing total capital investment to almost £15 billion. This exceeds our manifesto commitment of £13.2 billion and is a major step forward in the government’s plans to upgrade up to 5 million homes over this Parliament and cut energy bills for good. The transition to warmer, decarbonised homes, via the Warm Homes Plan, will include support for the most vulnerable to help tackle fuel poverty and ensure families are less exposed to volatile international fossil fuel markets. Instead, families will benefit from homegrown energy and the mission for clean power by 2030. Further detail on the Warm Homes Plan will be set out soon.