Energy Price Cap

What is it and how will it affect you in 2020?

Designed to protect consumers, the energy price cap prevents millions of households from being faced with mammoth increases in the cost of gas and electricity. It aims to stop you from being treated unfairly if the market price of gas or electricity shifts unexpectedly by putting a cap on how high charges can go.

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Although the energy price cap is often referred to as a single limit, there are, in fact, two types of energy price caps. One is for default tariffs and the other is for prepayment tariffs.

Due to the latest energy price cap review, the maximum that UK households will pay for their gas and electricity fell by £17 from April 2020. An average household on a default tariff would be charged no more than £1,162 per year. If you use a pre-payment meter, the average you would be charged is no more than £1,200 for the same period.

How price caps work

It's important to understand how this initiative works. The energy price cap doesn't mean there is an upper bill balance you won't go over. Rather, the more energy you use, the more you pay for your bill, just like you would expect. You won't be able to use an unlimited amount of energy without this being reflected in your bills.

You can lower your bills by reducing the amount of energy you use, improving your energy efficiency or by switching to another supplier.

Energy caps work by limiting the unit rate and standing charge on default contracts like standard variable tariffs. You'll see these terms on your energy bills:

  • Unit rate refers to the price of gas or electricity per kilowatt hour (kWh), which is the unit that's used to measure energy. Electricity usually costs more per kWh than gas. On a fixed-rate tariff, you pay an agreed amount per unit of energy, whereas, on a default tariff, the price you pay for each unit of gas or electricity can fluctuate wildly.
  • Standing charge refers to a fixed fee your supplier charges you for their service. Through your standing charge, you pay for everything apart from the energy you use (covered by your unit cost), such as being connected to gas and electricity networks or for customer service. Usually, this is a daily rate that stays the same throughout the year.

The energy cap means that suppliers are limited by how much they can charge per unit of energy through the unit rate, or for their service through the standing charge.

Default tariff cap

After coming into force on 1 January 2019, the default tariff energy price cap is reviewed and adjusted twice each year by Ofgem, the energy regulatory body.

Price caps are important for customers on default energy contracts such as standard variable tariffs because you won't have a set price for what you pay for each unit of energy you use. This makes you vulnerable to steep price hikes, reflecting the volatility of the energy market.

With the cap, even if your energy bills fluctuate because of the market, what you pay for each unit of energy will be capped by an upper limit. For the typical dual-fuel customer who pays for through direct debits, the default tariff is capped at £1,162 per year, slightly less than the previous limit of £1,179.

This limit was introduced by UK Parliament through the Domestic Gas and Electricity (Tariff Cap) Act and is implemented and reviewed by Ofgem, the independent industry regulator that works on behalf of consumers.

Standard variable tariffs usually have the most expensive rates, and sometimes customers are unaware that they are rolled on to these tariffs once their fixed-rate contract ends. To avoid ending up on the priciest contracts, you should shop around and compare energy deals when your current contract is coming to an end.

Pre-payment meter caps

There are four million pre-payment customers in the UK. There is a separate price cap, sometimes called the safeguard tariff, to protect them in much the same way that the default tariff cap protects customers on standard variable tariffs.

If you're on a pre-payment tariff, your bills would have been limited by a pre-payment price cap since it was introduced back in 2017. Ofgem enforces and reviews this cap, which is currently set at £1,200.

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Why energy caps are needed

When it comes to energy, many households are loyal customers. Even though switching energy provider is one of the best ways to reduce energy bills, one third have never switched.

However, loyalty has not necessarily benefited the customer. Historically, rather than rewarding customer loyalty, some gas and electricity companies have actively done the opposite. For instance, by making the best deals available to new customers only and blocking their current customers from accessing them.

This is no longer permitted, following Ofgem's Retail Market Review (RMR), and the observations made by Ofgem revealed that more needed to be done to improve the clarity and simplicity of energy deals and fair treatment for customers.

More than half of British households are on default energy tariffs that offer poor value for money and the energy cap has been introduced to prevent them from being mistreated and overcharged.

Who benefits from energy caps

The energy cap helps 11 million households in the UK. You automatically qualify for this support if you are on a standard variable or default tariff, or if you have a pre-payment tariff. It doesn't apply to fixed-rate tariffs because these usually offer much better value and the nature of a fixed rate means these customers won't experience unexpected price increases.

If you aren't sure which tariff you are on, you should be able to find out the details by checking your energy bills or logging into your energy company's online portal.

Looking back at your past bills, you may find that your charges fell in January 2019 when the cap was applied, but rose in April 2019 when the cap was adjusted. By April 2020, bills have fallen again. This is because there is a review to decide whether adjustments should be made to the energy cap every six months.

Compare and switch to save more money

Ofgem encourages people who benefit from the cap to compare energy deals to find deals with even better value for money. Even with the energy price cap, customers would be better off switching to a better deal with less fluctuation of costs. Usually, the cheapest gas or electricity deals involve switching to a competitive fixed-term contract.

Each year, only 15% of customers switch energy provider, and there are many possible reasons for this. Perhaps because the switching process seems daunting, or because people are loyal to their current supplier, or because they don't realise there are better options available.

In reality, the switching process is straight forward when you use a free online tool like Utility Saving Expert's comparison technology. It enables you to easily compare the offerings from trusted energy companies that provide great customer service and competitive rates.

What's more, you can use the energy comparison tool to make the switch, which involves minimal effort from you. No building work, piping or wiring needs to be done and you don't even need to contact your old supplier. All you'll be asked to do is input some personal details to confirm the switch, then provide a meter reading on the day the switch is complete. The rest is handled for you.

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How the energy price cap changes

Ofgem sets and reviews the price cap twice a year, considering a range of factors and implications such as the costs of:

  • networks and operational factors,
  • government policies and taxes,
  • environmental and social programmes,
  • wholesale energy.

The schedule for reviewing and adjusting the level of the energy price cap runs as follows:

  • February - review
  • April - adjust
  • August - review
  • October - adjust

The biggest intervention in the UK's energy market since privatisation, the energy price cap is a temporary initiative that is intended to run until the year 2023.

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How the price cap level has been adjusted

Since it started, the default tariff cap has varied by more than £100. Most recently, it fell from £1,179 to £1,162 per year for the April-September 2020 period:

  • 1 January 2019 to 31 March 2019 - £1,137 cap
  • 1 April 2019 to 30 September 2019 - £1,254 cap
  • 1 October 2019 to 31 March 2020 - £1,179 cap
  • 1 April 2020 to 30 September 2020 - £1,162 cap

Similarly, the pre-payment meter cap fell for the period from April-September 2020, from £1,217 to £1,200 per year. This price cap has existed for longer, introduced in 2017, and for the past two years it has seen rises and falls:

  • 1 October 2018 to 31 March 2019 - £1,136 cap
  • 1 April 2019 to 30 September 2019 - £1,242 cap
  • 1 October 2019 to 31 March 2020 - £1,217 cap
  • 1 April 2020 to 30 September 2020 - £1,200 cap

How the caps are calculated

Price caps don't automatically mean you won't pay more than the amounts shown above. These are estimates for an average household with:

  1. a typical energy usage,
  2. on a dual fuel tariff,
  3. with payment by direct debit.

Although the energy cap isn't a limit on your total bills, the figures outlined do give you an indication of the boundaries you'll see reflected in your bills, impacting both the cost of your per-unit rate and your standing order.

The calculations are made by analysing data to find the average annual energy usage, using the Typical Domestic Consumption Values (TDCVs) set by Ofgem. The medium TDCV level is:

  • 12,000 kWh of gas per year
  • 3,100 kWh of electricity per year

Costs can also be affected by where you live and how you pay:

  • There will be some variation depending on the region in which you live because of the cost of transporting energy.
  • Customers who pay by direct debit usually get the best rates.

How much money the price cap will save you

The price cap was expected to save 11 million households approximately £1 billion on their energy bills when it was introduced. On an individual level, this would translate to savings of around £76-120 per year, per household, based on average energy usage.

Even after Ofgem raised the limit in the spring of 2019, it claimed that consumers who benefited from the energy price cap would be paying £75-100 more on their energy bills without it. With the cap being continuously lowered from that point onwards, consumers should see even greater savings.

However, these cost savings don't outweigh the better deals on the market. The price cap from April-September 2020, set at £1,162 per year for an average household on a default tariff, is £300 more expensive than the cheapest available energy deals.

Switching from a price-capped default tariff to a competitively priced fixed-rate tariff is a better option. Ofgem itself recommends that if the price cap applies to you, it's a good idea to shop around to see if there are better cost savings elsewhere.

You can compare deals at UtilitySavingExpert.com by entering your postcode and some information from a recent energy bill. With these details, you'll see exactly how much money you could save if you were to switch to each energy deal you compare.

If you want to stay with your existing provider, you may find they offer a better deal. In this case, you can switch tariff rather than leaving your current energy company.

The energy price cap shows important progress for supporting energy customers, especially those who are vulnerable, elderly or at risk of fuel poverty, and protects 11 million households in the UK from paying extortionate gas and electricity bills.