Energy price cap on pre-payment meters tightened by Ofgem

About three million households are set to benefit from a tightening of the price cap on pre-payment energy meters, according to regulator Ofgem.

The regulator says the move will cut the average bill for pre-payment customers by up to £19 a year.

The change, which takes effect on 1 October, is set to cut the average annual bill for dual fuel pre-payment customers to £1,048 from £1,067.

On Sunday, a review was launched looking at ways to reduce energy costs.

The independent review, launched by the government, will examine how the UK can keep household bills down while also meeting its climate change targets.

A temporary price cap on pre-payment meters was introduced in April this year. It is updated by Ofgem every six months to reflect the estimated cost of supplying energy.

Ofgem said the change to the cap would reduce bills for electricity customers by about £19 a year on average, while the cap on pre-payment gas prices would remain broadly unchanged.

Many pre-payment meter customers pay through token- or coin-operated machines. Some of these customers may have had difficulties paying in the past. Others include some tenants whose landlords have the meters installed in properties.

Ofgem has found previously that competition among suppliers for pre-payment customers is less developed than for those who pay by direct debit, cash or cheque. This means that there are fewer tariffs available and they are generally more expensive.

Figures published in August last year showed that pre-payment customers paid an average of £220 a year more than those on the cheapest deals.

Leading suppliers argue that while their price rises were based on a longer-term view, the original pre-payment cap was based on an overestimate of the cost of ensuring extra power capacity this winter.

An spokesman for Energy UK, which represents the major suppliers, said: "Ofgem's calculations are not based on the full range of costs that energy suppliers face, and how each company deals with these costs will vary depending on its individual business strategy.

"For example, Ofgem sets the pre-payment meter cap every six months based on actual and projected costs at a specific point in time, whilst suppliers may purchase energy up to two years in advance so need to set prices in anticipation of what their costs will be over that period.

"It is right that we invest in renewing our energy infrastructure which will create a low carbon economy and ultimately benefit consumers. This does however have an impact on cost, which is why we welcome greater transparency over energy costs as part of the government's review announced this weekend."