Most British households, many feeling a cost-of-living squeeze, can expect cheaper energy bills from July after regulator Ofgem slashed its price cap to reflect a slump in wholesale costs.
Britain has the joint-highest rate of inflation among the Group of Seven nations along with Italy and official data this week showed consumer prices rose 8.7% in annual terms in April, slowing from March, but still at elevated levels.
Despite Ofgem's price cap cut, National Energy Action said some 6.6 million British households would remain in fuel poverty, a measure of how much income is spent on energy.
Ofgem's new cap of 2,074 pounds ($2,618) a year for average use of electricity and gas, known as dual-fuel, marks a near 40% fall compared with the previous level.
However, the price drop for most British households will be around 17% as since October a government guarantee has kept the average annual cost of energy at 2,500 pounds a year. Some 29 million customers are on standard rate tariffs protected by the price cap, Ofgem said in a statement on Thursday.
"After a difficult winter for consumers it is encouraging to see signs that the market is stabilising and prices are moving in the right direction," Ofgem CEO Jonathan Brearley said.
Government ministers welcomed the drop and said it would help reduce Britain's stubbornly high inflation.
Energy costs could still be difficult to manage for some customers, with prices historically high and likely to remain elevated, Brearley added.
"In the medium term, we're unlikely to see prices return to the levels we saw before the energy crisis," he said.
Cornwall Insight forecast the cap will fall again slightly in October, to an average of 1,976 pounds a year, before edging up to 2,045 pounds a year in January 2024.
Energy prices hit record highs in Britain and Europe last year after Russia's invasion of Ukraine cut gas supply.
The price cap in October 2020 was set at 1,042 pounds a year.
The government price guarantee will rise to 3,000 pounds from July and remain until the end of March 2024, but current price cap forecasts for the next year mean the government subsidy is unlikely to be needed.
However, Campaigners said the high energy prices show the country needs to invest in energy efficiency measures to help drive down use and overall costs.
"The government needs to use the summer to fix Britain's broken energy system... This means ramping up energy efficiency programmes, helping the public with energy debt and reforming energy pricing arrangements," said Simon Francis, coordinator of campaign group the End Fuel Poverty Coalition.
As part of reforms to the market, Ofgem also said on Thursday it would seek to slightly increase the profit energy suppliers are allowed to make under the price cap.
This change, which will add around 10 pounds to a typical annual bill, was needed to ensure companies are able to raise more capital and remain profitable and help to reduce failures which have added 83 pounds a year to average bills, Ofgem said. ($1 = 0.7923 pounds)
(Reporting by Susanna Twidale, additional reporting by Andy Bruce in London and Yadarisa Shabong in Bengaluru; Editing by Arun Koyyur, Jan Harvey, Shri Navaratnam and Alexander Smith)