Millions of British households will see cheaper energy bills from July after regulator Ofgem slashed its cap on prices following a slump in wholesale energy costs.

The news will come as a relief to British households suffering from the joint-highest rate of inflation among the Group of Seven nations, along with Italy. Official data showed consumer prices rose 8.7 per cent in annual terms in April, slowing from March, but still at elevated levels.

“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 in a statement.

The new price cap of 2,074 pounds ($2,618) a year for average dual-fuel use marks a near 40 per cent fall compared with the previous cap level.

However the price drop for most British households will be around 17 per cent as they have been protected by a government guarantee since October to keep the average annual cost of energy at 2,500 pounds a year to help with a cost-of-living squeeze.

Brearley said energy costs could still be difficult to manage for some customers, with prices still historically high and likely to remain elevated.

“In the medium term, we’re unlikely to see prices return to the levels we saw before the energy crisis,” he said.

Energy prices hit record highs in Britain and Europe last year after Russia’s invasion of Ukraine led to reduced gas supply from Russia to Europe.

The price cap in October 2020 was set at 1,042 pounds a year.

Campaigners said the stubbornly 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 so people don’t suffer again this winter,” said Simon Francis, coordinator of campaign group the End Fuel Poverty Coalition.

National Energy Network said some 6.6 million British households would remain in fuel poverty – a measure of how much income is spent on energy – despite the price drop.

As part of reforms to the market Ofgem also said on Thursday the amount of profit energy suppliers are allowed to make under the price cap would be slightly increased.

These changes will add around 10 pounds a year to a typical annual bill.

Ofgem said the change was needed to ensure companies are able to raise more capital and remain profitable and help to reduce company failures which have added 83 pounds a year to average bills.