• Valeria Shreiber

Energy price cap

Hi! You’re probably aware of the energy price cap, which was introduced on 1 January 2019 to stop energy suppliers from overcharging customers on default or standard variable tariffs. The cap limits the rates that suppliers can charge per unit of gas and electricity on these plans. But what is it and how does it work? Find out everything you need to know about the energy tariff cap — including whether this default tariff cap will help or hurt your bills — right here.

What is the default tariff cap?

The default tariff cap (also known as the safeguard tariff) is a limit on the unit rate and standing charge that energy suppliers can charge for standard variable - or ‘default’ - tariffs, and is set by Ofgem, the energy regulator.

This is only a cap on what suppliers can charge for standard tariffs, however; it does not ‘lock’ rates, and is therefore subject to a price rise or cut pending review by Ofgem.

The current default tariff cap is set at £1,127 per year (for the typical dual fuel customer paying by direct debit).

Standard variable tariffs are usually the most expensive rates that a supplier offers. If you haven't switched energy before, or you've rolled off a fixed energy deal, you're are likely to be on one of these tariffs.

People are likely on this tariff because they haven’t switched in the last couple of years or they’ve never switched at all! Even people who have switched are usually automatically put back on these expensive tariffs when their deal ends… so you can see how easy it is to end up on the worst tariff!

How does the price cap affect prepayment customers?

The price cap affects the four million prepayment customers in the UK in the same way that it affects customers on standard variable tariffs. There is a separate cap for prepayment tariffs, which is reviewed independently of the SVT cap by Ofgem. Currently, the prepayment cap is £1,164.

Why is the energy price cap controversial?

There are a few reasons why the energy price cap has come under fire from energy experts:

  • Better savings can be found by switching — At the time of the price cap change announcement in February 2020, the cap rate was still over £300 more than the cheapest energy deal on the market;

  • A cap hurts competition — Introducing a cap does not encourage suppliers to compete for business by offering better tariffs or improving customer service. There is no pressure on energy companies to innovate if customers believe they are ‘safeguarded’ from high costs and less likely to take their business elsewhere;

  • False sense of security — The cap can still go up (or down) as energy prices will always be subject to wholesale costs, distribution costs and other factors. The concern is that consumers will assume the price cap means they are protected from fluctuating costs by the government’s cap.

Should capping energy prices influence my decision to switch?

In a word, no. You should always compare your current energy deal using a bill switching app like ApTap to understand whether you could be paying less or getting better service by moving elsewhere.

A price cap only applies to you if you’re on a standard variable rate tariff. These tariffs are already some of the most expensive on the market, so it’s likely you could save by at least switching your energy tariff, if you’re not keen on switching suppliers.

And remember, the cap doesn’t protect you from price changes. Ofgem may raise or lower the cap per the wholesale market. So, when comparing energy deals, consider a fixed rate plan to secure your rates for a year or more and protect yourself from potential price increases.

How is the price cap set?

The price cap is set by Ofgem, the regulator for the energy industry. The methodology for Ofgem creating a cap level factors in a range of costs, such as the wholesale cost of energy, network costs, policy costs, operating costs and prepayment meter costs. Ofgem has committed to reviewing the level of the energy price cap twice a year in February and August, effective from 1 April and again from 1 October.

Energy cap myths

Myth 1: "My energy bills won’t exceed the amount set by the price cap"

FALSE. People talk about the price cap level using average figures, but the amount you pay depends on how much energy you use and where you live. Remember, this is a cap on unit rates, not your actual bill - the more energy you use, the higher the costs will be.

Myth 2: "The price cap will stay the same for at least a year, meaning my costs will too"

FALSE. Ofgem, the energy market regulator, reviews the cap twice a year. The level of the cap can go up or down at these times. If the cap rises, the cost of standard variable tariffs will rise too. But even if the cap drops, a good-value fixed deal is still likely to be cheaper.

Myth 3: "I’m on a good deal if I’m paying a lower price than the price cap level"

FALSE-ISH. You might be paying less than the price cap level, but it’s likely there’s a cheaper deal out there that can help you lock in your energy prices for a year or more.

The price cap doesn’t guarantee you’re on a good-value energy tariff. The only reliable way of doing that is to look for cheaper deals on ApTap. Why not get started now?

How has the price cap level changed?

The price cap was confirmed by Ofgem in September 2018 at an initial cap of £1,136, with a commitment to review the cap level based on any changes in the wider market in April and October each year.

The cap didn’t actually come into force until 1 January 2019, by which time it had been revised by a pound to £1,137. It was then reviewed and an announcement was made on 7 February 2019 that the cap would be raised to £1,254, effective on 1 April.

The price cap level was next reviewed in August 2019, and lowered by £75 (which came into force on 1 October 2019) as a response to falling wholesale costs across the continent.

The latest level of the price cap, reduced by £17 as of 1 April 2020. This means that standard variable tariff customers using the average amount of energy and paying by direct debit can expect to pay £1,127 across the course of the year (due to a change in the way Ofgem calculates average usage).

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