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What is the energy price cap?

What is the energy price cap?

The energy price cap is set by Ofgem, the government regulator for gas and electricity, and is a limit on the unit rate and standing charge that energy suppliers can charge.

The price cap protects two groups of customers from being overcharged:

  • households on default tariffs (often known as standard variable tariffs)
  • households on prepayment meters

There are two different price caps for customers on default tariffs. One for those who pay by direct debit, and another for those who pay by cash or cheque. The price cap also varies per region.

The price cap is for unit costs

The energy price cap doesn’t set a limit for your total bill — what is capped is how much can be charged for a unit of energy. Energy is measured in kWh or kilowatt hours.

Even with the price cap in place, the more units of energy you use, the more you will be billed. If you use a lot of energy, you can be billed more than the annual cost stated for the energy price cap because it’s based on average consumption.

To save more money on your energy bills, read the TotallyMoney guide to energy saving tips here.

Will the energy price cap affect me?

It doesn’t matter which supplier you are with, all suppliers must apply the price caps.

The energy price cap will affect you if you are on either:

  • your supplier’s standard variable (default) tariff
  • a prepayment meter

There are several reasons why you might be on a standard variable tariff:

  • you’ve never switched suppliers
  • your fixed energy tariff ended (normally after 12 or 24 months), and you didn’t take any action, so were automatically switched to your supplier’s default tariff
  • you moved house and didn’t agree a tariff with the property’s supplier

Your supplier can tell you if your energy tariff is covered by a price cap and give you specific details.

How much will I save?

The energy price cap stops energy companies charging what they want per unit of energy on default or prepayment tariffs.

But, these tariffs charge some of the highest rates for energy, and the price cap doesn’t change that.

Several of the biggest energy firms charge at the level of the price cap for their standard tariff. So, they are literally charging the most they can legally get away with.

If you are on your supplier’s standard tariff you could save hundreds of pounds a year by switching to a fixed tariff.

Fixed tariffs are not protected by the cap but offer much better value.

How is the energy price cap calculated?

Ofgem calculates the energy price cap. Its methodology factors in a range of costs, including:

  • wholesale costs of energy
  • network costs
  • policy costs
  • operating costs
  • prepayment meter costs
  • environmental and social programmes
  • tax
  • suppliers’ profits

Remember, the price cap is per unit of energy. If you use more gas and electricity than the average household, your bills will be higher than the price cap figure. But if you use less, your bills will be lower than that cap level.

What is the current energy price cap?

The current energy price caps cover the six months from 1 October 2020 to 31 March 2021.

  • if you’re on a default tariff and pay by direct debit the cap is £1,042.
  • if you’re on a default tariff and pay cash or cheque the cap is £1,121.
  • if you’re on a prepayment meter the cap is £1,070.

These figures are the average across the UK. The price cap varies by region

When does the energy price cap change?

Ofgem reviews the energy price cap twice a year:

  • in February, with the cap effective from 1 April
  • in August, with the cap effective from 1 October

On August 7th 2020 it was announced that the price cap for the winter period (October 2020 -March 2021) will be set to £1,042 for default tariffs. For prepayment meter customers this will be £1,070.

How can I check my energy supplier is charging me correctly?

It’s important to understand that the energy price cap puts a limit on how much you can be charged per unit of energy.

Your bill will depend on:

  • how many units of energy you use
  • how you pay (by direct debit or receipt of bill)
  • where you live
  • the type of energy meter you have

If you have any questions about your bill, contact your supplier in the first instance. It can provide you with information specific to your tariff.

How does the cap affect prepayment customers?

The price cap for prepayment customers is higher than that for households with a standard meter.

This is to reflect the higher costs of prepayment meters.

But, the cap works the same way. It limits how much a supplier can charge you per kWH of electricity or gas.

If you’re on a prepayment meter you will almost certainly be better off getting it changed to a standard meter and switching to a fixed energy tariff. You can do this even if you’re renting — your landlord can’t stop you.

You’ll need to contact your supplier to find out if you’re eligible to switch from a prepayment meter to a standard meter. This is likely to include a credit check to make sure that you can keep up with the monthly payments. If you pass the checks you may also have to pay for the installation. However, you’re likely to save money in the long term with a more affordable plan on direct debit.

Why you should still switch suppliers

You should still switch energy suppliers to get a better deal and save money, despite the energy price cap.

The energy price cap is there to protect people who are on their energy supplier’s standard variable tariff.

But, if you’re paying anywhere near the energy price cap you could be overpaying for your energy. Don’t let the price cap lull you into a false sense of security that you’re getting a good deal, as there are much cheaper deals available.

The same goes for prepayment meters. Although the price cap protects people on prepayment meters, you will still be paying a lot more for your energy than necessary.

Switching away from a default tariff or prepayment meter could save the average household over £300* a year.

Switching is quick and easy. There’s no change to the pipes that supply your home and there’s no need for an engineer to come to your home if you’re simply switching tariffs. Changing to a standard or Smart meter will take a bit longer and you’ll need to contact your supplier.

Switchers save cash – so be a switcher.


References

  1. Average saving for 38,341 customers per year by visiting TotallyMoney between Tuesday 21st January 2020 and 4th August 2020 on both standard and prepayment meters"

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