What the change to the electricity and gas bill 'loyalty penalty' means for you

Energy regulator Ofgem has announced two changes to protect consumers amid the cost-of-living crisis.

Millions of households are facing a growing squeeze on their budgets amid rising inflation, with the cost of electricity and gas bills set to increase by hundreds of pounds when the energy price cap is lifted in April.

The watchdog has now said plans to crack down on the 'loyalty penalty' which has affected households across the UK for years.

Ofgem said suppliers would be required to offer all their existing customers the same deals that new customers can sign up to.

These deals are only possible because longstanding customers are paying a higher price.

The regulator also wants to protect suppliers who responsibly buy energy in advance (hedging) by making energy companies pay a fee if they take customers from a rival when wholesale prices fall.

Many of the more than two dozen suppliers who have gone bust in recent months had not hedged properly.

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What is the loyalty penalty?

A ‘loyalty penalty’ is when long-standing customers pay more than new customers for the same service.

What was wrong with it?

Existing customers pay a higher price to make deals for new customers possible as the supplier thinks they are unlikely to shop around for a better price.

This means people who stay with their existing energy supplier pay significantly more.

What are the new rules?

Under Ofgem's short-term measures, energy suppliers will have to offer existing customers the same energy tariff deals as new customers.

It is a temporary decision designed to end offering cut-price deals to new households that sign up to a supplier.

Ofgem said it would monitor this measure's effectiveness before considering whether it becomes a long-term solution.

Watch: Why are gas prices rising?

The decision comes as energy prices have soared in the last year, and the average energy bill is set to spike by 54% for 22 million households from April.

Ofgem said: “The energy market has faced a huge challenge due to the unprecedented increase in global gas prices; a once-in-a-30-year event. We’re putting in place short-term measures to protect consumers.

“All suppliers will have to offer existing customers the same deals available to new customers.

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“This will ensure customers can benefit from all tariffs available in the market and enable more consumers to benefit when wholesale prices fall.

“We’ll monitor how effective this is before considering whether it should become an enduring measure in the market.”

Soaring energy bills are one element of a growing cost of living crisis, with families also facing record inflation, tax increases and increased fuel prices.