What is the Energy Price Cap?

The 'Energy Price Cap' is a legal requirement that energy suppliers must comply with in an attempt by Ofgem – the energy regulator, to protect households against unfair rises in gas and electricity costs and being overcharged for their home gas and electricity. The cap puts a limit in place on what suppliers can charge customers who are on either standard variable or default energy tariffs. It is these tariffs that around 15 million of the UK remain on and are, generally speaking, amongst the most expensive forms of energy tariff.

The energy regulator, Ofgem, reviews the price cap twice a year, once in April and again in October, to reflect changes in wholesale energy costs. The latest price cap was introduced on 1st October 2021 when the average yearly cost of a dual fuel energy bill moved from £1,138 to £1,277 - a rise of 12.2%.

How do energy price caps work?

Price caps work by setting a limit on the rates a supplier can charge for each unit of gas and electricity. Many households are stuck on expensive default tariffs that they have fallen into after a fixed rate energy deal has expired, when they move in to a new property or if they have never switched their gas and electricity provider. With the cap in place, suppliers can only charge up to a set amount for their default energy tariffs, therefore apparently (as Ofgem claims) saving households money on their energy bills.

The current energy price cap is set at £1,277 per year for a household that is on a standard variable or default tariff. You can find your details on your energy bill and will be able to see the cap being applied if you are on one of these tariffs. If you are on a fixed rate tariff then the cap will not apply to you.

Even with the cap in place, this doesn't mean you won't end up paying more for your energy each year. Price caps are set at a unit price (the amount you pay for each kilowatt hour used) plus standing charges (the amount charged each day whether you use energy or not). With the cap being set by averaging out annual energy usage, if you use more energy than the medium typical domestic consumption value (TDCV) - meaning "the average household", you will still be charged extra. Equally, if you use less, then your annual energy bill will be lower.

Price caps are also based on your region due to transportation costs and you could see higher rates if you don't pay by direct debit.

How much does it save customers?

The default price cap, which protects around 11 million households according to Ofgem, has increased by £235 since October 2020. Whilst this is an increase (of 23% in 12-months), the cap is subject to change pending review by Ofgem twice a year and right now, given the eyewatering movements in wholesale gas prices (which is how we make most of our electricity…as well as heat our homes and food) it as actually working in the sense it is keeping consumer bills lower than they otherwise would be. For example, we are now seeing energy suppliers launch "fixed" rate energy tariffs (which aren't controlled by the cap) hit as high as £3,000 a year for an average user. So, whilst the cap is clearly working right now, this is only for the next 6-months and come mid-February 2022, when the next cap level is announced, energy experts expect consumers to be heading towards a further price hike of 30% meaning the average energy bill for a dual fuel customer on a "Standard Variable" tariff will be a staggering £1,660.

Why you should switch energy supplier

Usually, with the cap in place for standard variable or default tariffs, the best way to make big savings to your energy bills is to switch energy suppliers. As the price cap doesn't protect you from price fluctuations it's generally best to consider a fixed rate plan to secure the price you pay. However, these aren't normal times and as we have said above, right now sitting on a "Standard Variable" tariff for the next 6-months is by far the best way to keep your bills down. And so, for the first time in our history, we're telling you to NOT SWITCH. Instead, sit back, keep your bills down this Autumn/Winter and, if the market for switching returns, be ready to switch next February or March before the new cap level is introduced on 1st April 2022.

Here at The Energy Shop we take the pain out of the process and can guide you through exactly how to switch supplier and get the best rate. Once you've chosen your deal, thanks to the Energy Switch Guarantee, your new provider will take care of the switch and you won't have an interruptions to your service.

Use our energy price comparison service today to find out exactly how much you could be saving.

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