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What is the energy price cap – and how does it affect my bills?

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What is the energy price cap?

The energy price cap is a tool for controlling the cost of gas and electricity in the UK. It is wielded by industry regulator Ofgem and serves customers who rarely or never change energy tariffs.

The headline rate changes twice a year and is expressed as an annual cost in pounds. It is based on a typical consumer using a ‘medium’ amount of gas and electricity each year. But it is a guideline figure for the sake of simple comparisons.

What is changing?

Ofgem’s energy price cap for April 2021 will increase to £1,138 for a period of six months, affecting 11 million people. This is a £96 rise for medium energy users. For the four million customers with a pre-payment meter, the cap will be £1,156, which is an £87 increase.

Why does the price cap exist?

It was introduced to prevent customers from paying disproportionately high prices for domestic fuel. Switching to a new energy deal or provider is the best way to save money each year – that’s what we say, and it’s what Ofgem says as well. But many people are unaware, don’t bother, fear change or don’t know where to start.

With no cap in place, millions of households were charged unduly high prices for staying with the same provider each year. Others were penalised based on the type of meter they had. So, the cap was introduced on 1 January 2019 to ensure customers are at least paying relatively fair energy prices.

How does it affect my bills?

A cap on energy prices can help keep bills in check. It safeguards 11 million customers on ‘standard variable’ or ‘default’ tariffs, and four million households with prepayment meters.

Customers land on standard tariffs when they don’t actively choose a new deal. This includes people who perhaps switched some time ago, but the initial deal has since ended. Standard tariffs are usually the most expensive on the market.

It’s important to note the cap is not the maximum amount customers pay on their annual energy bill. People using a lot of fuel throughout the day are still going to pay for that consumption.

Rather, it puts a ceiling on the price paid per unit of gas and electricity used. It is a cap for prices, not bills.

It also applies automatically – customers don’t need to ask for it.

Ofgem estimates households save between £75 and £100 a year as a result, even if the cap rises.

It won’t impact customers on fixed tariffs, who are already protected from fluctuating energy prices. People who switch around once a year often pick these deals because they are cheaper.

Meanwhile, customers on certain renewable energy tariffs won’t be impacted by the cap if Ofgem has declared those tariffs exempt. These tariffs may cost more because they support renewable energy in a significant and meaningful way, and customers are likely to have chosen them for that reason.

How does it work?

The cap rises and falls according to what suppliers themselves have to pay. Market costs are monitored by Ofgem and changes are reflected in tweaks to the cap in April or October. Advance notice of the new rate is shared publicly in February and August.

If market costs are higher, the cap goes up and customers pay more. If outgoings fall, so do energy prices at home. It forces suppliers to pass on any savings, but yields when they face higher costs.

Controlling energy prices in this way is a temporary measure, one which will expire at the end of 2023 at the latest.

It is designed to fill a gap while Ofgem works on other ways of making the energy market competitive and fair. This includes speedier switching times and the rollout of ‘smart meters’, which automatically send meter readings to suppliers.

How is the price cap calculated?

Ofgem relies on benchmark figures for low, medium and high household energy usage. These are known as ‘Typical Domestic Consumption Values’. For a medium user it is 12,000 kWh of gas and 2,900 kWh of electricity.

Households will use more or less than this depending on a range of influencing factors – such as property size, how well it is insulated and how often people are at home. This is just a reasonable estimate.

For customers with an Economy 7 meter the medium benchmark for electricity use is 4,200 kWh.

Multiplying kWh figures by the capped unit prices for gas and electricity gives an annual cost for energy supply. Standing charges are also added. These are fixed daily prices paid for the delivery of gas and electricity to a property. There is one charge for each fuel type.

The price cap also varies according to three factors:

  • how you pay (direct debit versus on receipt of a bill, for example)
  • what meter you have (traditional or prepayment)
  • where in the country you live, since costs differ between regions.

To find out the precise capped rates on your tariff, contact your energy provider.

Do I still need to switch?

The price cap protects customers from paying unfair costs, but is not an effective tool for cutting bills.

Suppliers cannot charge more than the price cap, but they can and do charge less when customers sign up to a fixed tariff. So, the best way to save money on energy bills is to compare tariffs and be prepared to switch.

Those who haven’t switched recently, or have never done so, stand to make the biggest savings. You can either ask your current provider for a cheaper tariff, or compare deals across the market for potentially bigger savings.

Once a cheaper tariff is found, the switching journey should be straightforward. It takes around three weeks to complete, involves little effort, and comes with a raft of guarantees to ensure no disruption to supply or finances.

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