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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.

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.

Peter Earl
From the Energy team
5
minute read
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Posted 21 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?

On 20 October 2020, the UK Government announced that the current energy cap will be extended until the end of 2021.

The level of the cap is set by Ofgem every February and August. Ofgem 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:

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 cap of £1,042 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 £1,070 applies 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 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. On 20 October 2020, the UK Government announced an extension to the current energy cap, which will now last until the end of 2021.

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

“It’s encouraging that the government recognises that the best way for people to save on energy bills is by switching. A big problem with the price cap, however, is that since it was introduced in 2019 the number of people switching energy supplier has declined – and as a result, millions of households on standard variable tariffs are potentially paying hundreds of pounds more than they could be for an essential utility. There is a real risk that the British public interpret the government’s extension to the price cap as an endorsement that the cap is an affordable price to pay for energy, when it reality it should be considered the absolute ceiling that people pay.

“With millions more people at home due to widespread regional lockdowns and an increase in the number of people working from home, it is important for households to shop around for a better value energy deal to avoid a bill shock this winter. There are currently 191 energy tariffs on the market cheaper than the £1,042 price cap, and as the temperature drops and people turn the heating up a notch or two, switching to a competitively priced one or two year fixed-rate deal is an effective way for households to lock-in a cheaper energy deal.”

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.

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