The energy regulator is proposing a cap of £1,136 per year for a typical dual fuel customer paying by direct debit, and said suppliers will have to cut their prices to the cap or below.
According to Ofgem, 11 million households currently on default deals will save £75 per year on average, while a typical consumer on the most expensive tariff stands to save over £120.
Ofgem said it is working to have the cap in place by the end of the year.
Chief executive Dermot Nolan, said: “Ofgem has made full use of the powers Parliament has given us to propose a tough price cap which will give a fairer deal to consumers on poor value default tariffs.
“Once the price cap is in place, all households in Great Britain covered by the cap will be protected from being overcharged for their energy. Consumers can have confidence that falls in energy costs will be passed on to them and if costs increase, Ofgem will ensure that any rise will be due to genuine increases in energy costs rather than supplier profiteering.”
Mr Nolan added: “Households protected by the cap will be able to save even more money by shopping around for a better deal ... Ofgem will continue with reforms which aim to deliver a more competitive retail energy market which, combined with protection for those who need it, works for all consumers.”
Gillian Guy, chief executive at Citizens Advice, said the cap was “an important step in the right direction”.
She added: “While the price cap should save people on standard variable tariffs money, people should still be able to find a better deal on their energy bills by shopping around.”
Ms Guy also called on the government to take action on the “equally unfair loyalty penalties which exist in other markets, such as mobiles, broadband and insurance”.
Citizens Advice has found that these can cost people up to £1,000 a year, she said.
However, Richard Neudegg, head of regulation at uSwitch, said Ofgem is “playing a dangerous game” by saying that customers will always be paying a ‘fair’ price for their energy under this cap.
“£1,136 a year is still almost £300 more expensive than the cheapest deal on the market,” he said.
“Customers are being sold a cap trap under the guise of a silver bullet. Rather than tackling the very real challenges faced by vulnerable households, this price cap condemns energy customers to more of the same – high bills, poor service and suppliers resting on their laurels.
“There’s a very real danger that customers will feel they can now stay put rather than vote with their feet – gravely damaging competition and guaranteeing that prices stay high for all.”
Mr Neudegg said that Ofgem’s own assessment of the proposed price cap “shows that unfortunately it’s the customers doing the right thing by moving to a better energy deal who will be the ones hardest hit, with the potential for their bills to rise by up to £810m”.
“It’s vital that this cap doesn’t undo the great progress that has been made towards building a fully competitive energy market. There are over 70 suppliers in the market and switching is at record levels. We’re about to reach a tipping point, where the majority of customers will no longer be on a standard tariff – but that’s all at risk under a cap, if energy companies give the 10 million customers who have switched a slap in the face by removing the cheaper deals and pricing up towards the threshold.” he added.
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