The energy price cap explained

A new energy price cap level has been announced by Ofgem. The level of the cap – which is supposed to make bills for those on standard and default tariffs more affordable – will actually increase, effective from 1 April 2021.

A new energy price cap level has been announced by Ofgem. The level of the cap – which is supposed to make bills for those on standard and default tariffs more affordable – will actually increase, effective from 1 April 2021.

Peter Earl
From the Energy team
5
minute read
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Posted 5 FEBRUARY 2021

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 rise by £96 from 1 April. Ofgem says this is because of increases in wholesale energy prices.

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:

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 increases for their default and standard variable tariffs in response to the increase in the cap level, meaning bills for some are likely to become more expensive.

Consumers who fail to shop around or don’t 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.

Ofgem says that the cap “continues to save consumers up to £100 a year”, but acknowledges that they can save more by switching to a more competitive tariff.

How will the cap work?

The new cap of £1,138 applies 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 £1,156 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. On 5 February 2021, the regulator Ofgem announced that the cap for four million prepayment meter customers would rise by £87, to £1,156.

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.

Peter Earl

Head of energy at comparethemarket.com

“Raising energy costs for millions of households by an average of £96 is an extraordinary move in the current environment. It calls into question the whole point of a price cap which was designed to protect the most vulnerable households.

“Many are already struggling with the financial impact of the pandemic – our research shows that nearly three out of 10 (29%) families with children at home struggle to pay their bills every week. This announcement coincides with the shock of energy bills being received after a winter spent in lockdown. The additional £23 hit announced earlier this week to recover the costs of unpaid bills in the cap’s 'Adjustment Allowance' ignores the fact that many are still in a very difficult and precarious financial situation. It undoes the good work by the industry in supporting customers through the pandemic, which is far from over.

“The price cap does not represent good value for money and households can save hundreds of pounds by switching supplier. We would encourage any household on a supplier’s variable tariff to take a few minutes and check if they can save money by moving elsewhere.”

How to compare energy prices 

It’s quick and straightforward to run an energy comparison through 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.

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