The Energy Price Cap

You may have heard about them but are not exactly sure how it works or what it does. So how does the energy price cap work?

When does the energy price cap start?

The domestic energy price cap started on 1st January 2019 and will benefit about 11 million customers on poor value tariffs.

Price cap on energy bills

The energy regulator Ofgem has imposed a price cap on how much energy suppliers can charge per unit of energy. It only applies to those who are on their energy providers standard variable tariff, the tariff you are charged by default if you do not pick a tariff for yourself. This tends to be the most expensive tariff your provider has.

It also applies to Prepayment meters and those eligible for the warm home discount where your price is protected. The idea is to protect those most vulnerable from price increases by limiting how much your supplier can charge.

It does not cap your total bill only the cost for each unit you use. So if the cap is set at 24 pence per kWh of electricity then you cannot be charge more than 24 pence per unit. It will not affect the number of units your use so if you use a lot of gas and electricity your bill will still be high and not capped.

Prepayment meter price cap

If you are on a prepayment meter then you are likely to be paying a higher rate and so ofgem has protected you by imposing a price cap on how much your energy company can charge you per unit.

The current prepayment price cap is in place until 2020.

Warm home discount

Before the default tariff cap started on 1 January 2019, people who got the government’s Warm Home Discount and were on a default tariff (including standard variable tariffs) were protected by the Prepayment Price Cap.
Ofgem

Energy Price Cap in the UK

The energy price cap is in place until 2023 when it is hoped changes in the energy market will make it easier and faster to switch energy providers to take advantage of lower cost energy tariffs.

The current price caps are reviews every 6 months on 1st April and 1st October until the cap comes to an end.

Do I need to switch?

If you are on your suppliers standard or default tariff for gas and electricity you are protected by the price cap but you are not paying the cheapest price for your energy.

The standard variable tariff charged by energy companies is more expensive than their fixed or variable deals. Smaller suppliers will have even cheaper deals if price is your main concern.

If you are on a default tariff then switch

If you are on the suppliers standard or default tariff you need to switch to save money. People who have never switched stand to make the largest savings. If you look at the market rates for February 2019 the difference between the most expensive and the cheapest tariff is £539.

Most people will not save £539 by switching as most people are not on the most expensive gas and electricity tariff. If you are on a default or standard variable tariff then you are likely to save hundreds of pounds. Take a look at how much you can save by switching where you can see the Ofgem approved comparison sites list of savings made by customers switching.

Is my tariff capped?

With the government energy price cap bills will be reduced but it does not cover everyone, only those that are deemed to be paying an unfair price for their energy. The government body Ofgem defines these groups that meet the following criteria.

1. Use a prepayment energy meter.
2. On a default Standard variable tariff (SVT) you did not choose.
3. Are eligible for the warm home discount and on a default energy tariff.

If you have switched to get a cheaper tariff you will already be paying less than the energy providers default tariff and so will not benefit from the price cap. You are already in a better position financially compared to those benefiting from the default tariff price cap.

If you are on one of the expensive tariffs the price cap is automatically applied so you do not have to do anything. You could however save much more if you switch to a cheaper gas and electricity tariff where you are likely to save several hundred pounds.

Will my bills increase?

If your tariff is one that is covered by the energy price cap your bill will still increase when the price cap is reviewed every 6 months. As we have seen as soon as the new price cap limit is introduced the energy companies increase their prices up to the limit.

The April 2019 price cap change meant that those on the more expensive standard tariffs would pay on average about £120 more on their bills. This figure is often quoted for the average household, if you use more than the average the increase will be more significant.

It is important to understand that the price cap is not a cap on the amount that you pay in total for your gas and electricity but rather a cap on how much suppliers can charge on their most expensive tariffs.

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