Energy price cap - what you need to know

Introduced in January 2019, the energy price cap has been designed to protect consumers on their supplier’s default tariff. While it doesn’t cap the total amount you’ll pay for your energy, it does cap the amount your supplier can charge per unit of gas & electric.

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What is the energy price cap?

The energy price cap was introduced in the UK on 1 January 2019. The cap was established to limit the price energy suppliers can charge for default and standard variable rate tariffs.

Implemented by an act of Parliament, the Domestic Gas and Electricity (Tariff Cap) Act is administered by Ofgem, the energy market regulator. The expectation of the energy price cap was to reduce the energy bills of 11 million UK households.

Ofgem has reviewed and adjusted the energy price cap every 6 months since it was first introduced. Starting at £1,137 a year (for a typical UK home) in January 2019, Ofgem’s review in August 2020 saw the price cap to drop to £1,042. This was due to the reduced demand for energy causing market prices for gas and electric to fall to historic lows because of the impact of the Covid-19 pandemic.

However, in February 2021 Ofgem announced the price cap would be increased for the first time in two years. Set to come into effect on 1 April 2021, the new price cap will be £1,138.

How does the energy price cap work?

The energy price cap affects the rate charged per unit of gas and electric on a suppliers default or standard variable rate tariff. Because of this, it doesn’t limit how much you’ll actually pay in total.

For instance, the current price cap means a typical UK household on a standard variable rate tariff will pay no more than £1,042. However, if you use more energy than the average UK household, you’ll be paying more.

There are two types of price cap:

  1. Default price cap - £1,042 per year from 1 October 2020 - 31 March 2021

  2. Prepayment price cap - £1,070 per year from 1 October 2020 - 31 March 2021

So, if you’re on a fixed rate tariff, the energy price cap isn’t applicable to you. But that’s not a cause for concern - most fixed-rate tariffs are cheaper than their supplier’s standard variable rate tariff. You should, however, be aware of when your fixed-rate tariff is due to end because it’s likely you’re supplier will then roll you on to their more expensive standard variable rate tariff.

It’s also important to note that, should the energy price cap be increased, suppliers could increase the rates on their standard tariff to match the cap. Meaning, you’ll end up paying more.

Is the energy price cap good?

The energy price cap is a step in the right direction as it protects millions of UK households from being charged extortionate amounts for their energy.

However, don’t forget, because fixed-rate tariffs are still cheaper than standard variable rate tariffs, the price cap represents the most you’ll pay for your energy.

How can you save more on your annual energy bills?

If you are one of the estimated 11 million UK households who are on your energy suppliers standard variable rate tariff, the most effective way you can save on your energy bills is by switching to a cheaper tariff.

You don’t need to be concerned about exit fees as they don’t apply to standard variable rate tariffs, so you’re free to switch to a better energy deal at any time.

Even if you’re on a fixed rate tariff, you might still be able to find a better deal on your energy.

See how much you could save by comparing today.

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Author: mo


Category: Guide

Tags: Energy