The energy price cap explained
The energy price cap explained
A new energy price cap level has been announced by Ofgem. The level of the cap – designed to make bills for those on standard and default tariffs more affordable – will fall, effective from 1 October 2020.
What is the energy price cap?
The energy price cap limits the amount energy companies can charge customers who are on default tariffs, including standard variable tariffs (SVT), and customers who use prepayment meters.
Will the price cap level change?
The level of the cap is set by Ofgem every February and August. Ofgem has now announced that the price cap will fall by £84 from 1 October. Ofgem says this is because of lower wholesale energy costs following COVID-19.
The cap is reviewed every six months and rises and falls largely depending on the price movements of the wholesale energy markets. If energy prices go down, caps fall. If prices go up, the caps rise.
How does the cap work?
The energy price cap puts a ceiling on the unit (kWh) price of energy and on the standing charge applied to bills. (The standing charge covers the cost your energy supplier takes on, to supply your home with electricity and gas.)
However, the energy price cap doesn’t cap your total energy bill. The more energy a household uses, the higher its bill will be.
Who benefits from the energy price cap?
Prices are capped for people who:
- Use prepayment meters for their energy
- Have the Government’s Warm Home Discount and/or:
- Are on a standard variable tariff or a default tariff
If you’re on a fixed-term tariff, your energy prices won’t be capped. The price you’re paying is already likely to be lower than the SVT.
If you’re not sure whether you’re eligible for the energy price cap, you’ll need to contact your supplier.
What does the energy price cap mean for me?
Some energy providers could introduce price decreases for their default and standard variable tariffs in response to the decrease in the cap level, meaning bills for some may get cheaper. However, despite a reduction in the cap level, consumers who fail to shop around or opt to switch their energy to fixed rate tariffs will, most likely, continue to overpay for their energy, as they miss out on cheaper deals on the market.
Default and standard variable tariffs are usually more expensive than fixed-rate tariffs. Fixed-rate tariffs last for a set amount of time, usually 12 or 24 months, with the price per unit of energy fixed for the duration of the deal. You’re not affected by the cap if you’re on a fixed tariff.
Your tariff details can be found on your latest bill or in your online account. If you’ve never switched from one energy company to another, or haven’t switched for a while, it’s likely you’re on a default or standard tariff.
How will the cap work?
The new cap of £1,042 will apply to default and standard tariff customers who get their gas and electricity from the same supplier, pay by Direct Debit and use an average amount of energy each year. The figure varies if you use a different payment method. A cap of £1,070 will apply to people who have prepayment meters.
The actual size of your bill depends on your energy consumption, so you could end up paying more, or less, than the level of the cap, depending on your usage.
There are regional differences in the price cap which reflect different network charges.
Will the price cap be displayed on my energy bill?
Whether the price cap will be shown on your energy bill depends on your supplier. But all suppliers must inform their customers if their tariff has changed in any way.
What is the prepayment tariff price cap?
This is the price cap that applies if you use a prepayment meter for your energy.
What is the default tariff price cap?
This is the price cap that applies to you, if you’re on your supplier’s standard variable tariff or default tariff and meet the other eligibility requirements. You’re likely to be on a standard variable tariff if your deal has come to an end, and you haven’t switched.
How long will the price caps last?
The default tariff cap is expected to last until 2023. The prepayment price cap had been expected to finish at the end of 2020. However, on 7 August 2020 Ofgem recommended that the price cap should stay in place in 2021 for households using prepayment meters and default tariffs.
What will happen to the price cap if I move home?
If you have an energy price-capped tariff and you transfer it to your new home, the cap will continue. However, moving home is an ideal time to see if you can switch to a better deal – and if you’re on a standard variable tariff, there won’t be any exit fees to consider.
It may also be a good time to see if it’s possible to move from a prepayment meter onto a regular meter. Find out more about moving home and switching energy supplier.
Head of energy at comparethemarket.com
“Don’t be fooled into thinking you’re getting cheap energy. The price cap is not a good deal, it’s a maximum price limit. While it’s encouraging that from October customers on a standard or default tariff (SVT) on average will see their annual bill fall by £84, the customer could stand to save, on average, £217 more if they switched to one of the best priced deals on the market.
“Customers who have switched supplier in the current price cap period have benefited from some of the lowest prices we’ve seen in recent years. The pandemic crisis has seen a rise in energy costs for households spending more time at home, paying £32 per month more on average. Customers on an SVT will have paid even more.
We urge people to avoid being lulled into inertia as a result of this news, but rather shop around to see what savings they can make by switching.”
How to compare energy prices
It’s quick and straightforward to run an energy comparison at Compare the Market. We’ll show you a range of tariffs, and once you’ve chosen a switchable tariff, your switch could be completed within three weeks, with no interruption to your supply.Compare now