Ofgem energy price cap explained
The government has announced that the energy price cap will be extended until the end of 2021, following recommendations from Ofgem in August.
Following the cap's the fourth price review since it was introduced in 2019, the energy regulator announced the level for October 2020 until March 2021 would be £1,042 for typical users paying by direct debit.
Ofgem announced a £17 cut for April last year, and has subsequently said it will knock an additional £84 off the level of the cap, to reflect the drop in wholesale gas prices.
At the last review, a change in how 'typical use' is calculated, along with a drop in household's average electricity usage, means the cap appears to have dropped by a further £35, which could see lower energy bills for around 15 million households on prepayment and standard variable rate tariffs.
But it's not quite that straightforward and, even if prices had been cut by £52, switching energy supplier would still save you more money.
How much is the energy price cap?
From October 2020, the price of an average standard variable energy tariff will be capped at £1,042 a year - down £84 from it's previous level of £1,126. The average price of prepayment gas and electricity will be cut by £95, from £1,165 to £1,070.
This means the price cap is now at its lowest level since it was introdcued in 2019.
Even so, comparing energy prices and switching is still the most effective way to save.
There are currently around 100 cheaper tariffs available to customers switching from a standard variable rate tariff, meaning you can switch to a deal that delivers a saving that is three times what the price cap drop offers.
And switching from a variable rate to a fixed rate deal means you'll lock your rate in, and not have to deal with these twice-yearly fluctuations alongside any price hikes implemented by your supplier.
What is the energy price cap?
The energy price cap limits the rates energy suppliers can charge on standard variable rate and prepayment energy tariffs. Introduced by the UK government, the limit is set and reviewed every six months by Ofgem, the energy regulator.
Why was the energy price cap introduced?
Energy suppliers set different rates for different tariffs designed to meet the different needs of consumers across the country. Although changes within the industry led to the introduction of simpler and cheaper energy tariffs, it’s still the case consumers sat on standard variable rate plans pay more for their energy. The price cap was introduced to help customers on more expensive default and prepayment tariffs.
Why has the energy price cap been extended?
The price cap is reviewed by Ofgem twice each year, with any changes coming into effect in April and October.
It was due to end in 2020, but this decision was subject to a review from the regulator and will now continue throughout 2021.
Although switching energy supplier remains the most effective way to save money, the cap has saved around £1 billion so far, which works out at between £75 and £100 per household.
Ofgem's chief executive, Jonathan Brearley, said it would "continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy system".
How does the energy price cap work?
The cap on energy prices works by setting a maximum rate energy suppliers can charge per kWH of gas and electricity (also known as the ‘unit rate’), for households on prepayment and standard variable rate energy tariffs.
The Prepayment Meter Cap, also known as the Safeguard Tariff, was introduced in April 2017 to help low-income households and vulnerable energy customers, by limiting the unit rate suppliers can charge anyone who pays for gas or electricity in advance using a prepayment meter (including through a token-operated meter).
This Safeguard Tariff also protects customers who receive the government’s Warm Home Discount and are on a standard variable or default tariff. If you receive the Warm Home Discount but you’re on a fixed-rate tariff that you’ve chosen yourself, then this price cap won’t apply to you.
The government’s price cap on standard variable rate tariffs, known as the Default Tariff Price Cap, came into effect on January 1, 2019 and was set at a rate of £1,137 a year for a typical dual fuel customer paying by Direct Debit. This meant suppliers had to cut the price of their default tariffs, including standard variable tariffs, to the level of or below the cap.
Both price caps are reviewed twice a year – in February and August to apply in April and October respectively – and adjusted if necessary.
How much is the energy price cap?
The latest price cap reviews have seen Ofgem cut the the Prepayment Meter Cap by £17 to £1,200 per year, while the Default Tariff Cap has dropped by £17 to £1,162 per year for a dual fuel customer with typical usage.
|Date||Price cap cost||+/-|
*drop is £17 although the price cap appears to have dropped by £52, due to a change in the way Ofgem calculates 'typical' household use.
A timeline of the government cap on energy prices
The idea of a price cap on energy rates had been floating around for a number of years before it was finally implemented, here is a timeline of the government energy price cap:
- April - After first floating the idea of an energy price cap in 2011, Ed Milliband, then leader of the Labour Party makes it an official manifesto pledge in the run up to the 2015 general election. It’s a suggestion that is roundly derided by Conservatives.
April - The Conservative party does a u-turn and makes an energy price cap part of its manifesto in the run up to the 2017 general election.
The Prepayment Meter Cap, also known as the Safeguard Tariff, is introduced to help low-income households and vulnerable energy customers.
August - After winning the general election, the Conservative government launches a review into the domestic energy market, possibly sparked by consumer outrage at a series of energy price hikes, including a 15% increase from Npower.
December - Ofgem confirms extension to the prepayment energy price cap, also known as the safeguard tariff, will include households on standard variable rate tariffs, but states the cap won't be implemented for at least another 12 months.
February - Government confirms it is to publish a draft bill to cap prices on standard energy tariffs to try and end “rip-off energy prices”. But MPs warn the cap must be in place by winter to stop consumers being ripped off by Britain’s ‘broken’ energy market.
Ofgem announces it will increase the prepayment meter price cap by £57 in April, affecting 5 million vulnerable households.
July - The Domestic Gas and Electricity (Tariff Cap) Act 2018 becomes law on July 19, giving Ofgem, the energy regulator, a duty and the powers to put the energy price cap in place.
September - Ofgem confirms it will be capping the cost of all standard variable rate tariffs at £1,137 a year, effective from January 1, 2019. More than £11 million households stand to save around £76 a year on their annual energy bills.
October - Ofgem announces another increase to the prepayment price cap, which increases by a further £47. Increased wholesale prices are blamed.
November – Initial fears emerge that the energy price cap will present a big challenge for many of the 70+ household energy suppliers, who are already dealing with wholesale costs rising by up to 30%. 2018 saw 11 energy suppliers cease trading.
December – Further signs that the energy price cap may not work as planned, as the number of cheap energy deals – those costing less than £1,000 per year - dropped by 90% during 2018, falling from 77 at the start of the year to just eight by the end of it.
February – In its first price review, Ofgem announces the energy price cap will increase by £117 in April 2019, pushing the average standard variable energy tariff up from £1,137 to £1,254 a year.
April – The energy price cap rise takes effect, with many suppliers increasing their prices in line with the £1,254 a year limit.
June - Shell Energy is ordered to refund and compensate around 12,000 customer accounts it overcharged on its default tariffs when the price cap was introduced. In addition, the supplier has to pay £200,000 to Ofgem’s consumer redress fund, equating to a total payment of £390,000.
August - Ofgem announces the price cap will be cut by £75, bringing the annual cost of a standard variable rate tariff down to £1,179, while the prepayment cap will be lowered by £25 to £1,217 a year.
October - The new price cap rate comes into effect, reducing the level of the cap by £75 and level of the prepayment cap by £25.
February – In its thrid price review, Ofgem announces the energy price cap will decrease by £17 in April 2020, meaning the average standard variable energy tariff will drop from £1,179 to £1,162 year. The average price of prepayment gas and electricity to fall from £1,217 to £1,200.
April - Ofgem changes the way it calcualtes how 'typical' household energy use is calculated and the price cap drops to £1,179 to £1,127 year. The average price of prepayment gas and electricity to fall from £1,217 to £1,164.
August - Ofgem announces the price cap will be cut by £84, bringing the annual cost of a standard variable rate tariff down to £1,042 - its lowest level to date. The prepayment cap will be lowered by £95 to £1,070 a year.
October - Folloiwng recommendations from Ofgem, the government announces the price cap will be extended throughout 2021.
Will price cap on energy bills save you money?
The amount the price cap saves you will depend upon the following factors:
- How much gas and electricity you use
- The cost of your current energy deal
- Whether it’s a dual fuel tariff
- The way in which you pay your bills.
As mentioned above, the cap has been based on the average dual fuel customer who pays by Direct Debit, this means that you could still find your annual bills amount to more than the stated price cap maximum.
The price cap limits the unit rates households pay on their supplier’s default, standard variable rate tariff, which is the deal you’ll find yourself on if you’ve never switched supplier, or you’ve let a fixed rate deal expire without switching.
The initial £1,137 annual energy bill was simply an estimate for an average household, which Ofgem’s latest Typical Domestic Consumption Value figures put at 12,000 kWh for gas and 3,100 kWh for electricity. This means your actual bill will depend upon how much gas and electricity you use.
The region you live in also affects the price cap level. Households in northern Scotland, for instance, saw the first Default Tariff Price Cap set at £1,154, while those in south west England were set an upper limit of £1,173. Customers in the east Midlands will saw the lowest rate, where the initial level was set at just £1,111.
The way in which you pay your bills also has an effect on the prices you pay. If you don’t pay your bills by Direct Debit, for which most suppliers offer discounted rates, you could find yourself paying a whopping £83 more than those that do.
This also means the estimated saving of £76 a year isn't guaranteed, as many customers will use more or less energy than the average, and some suppliers will have to change their prices by more than others to comply with the cap.
What is the problem with the price cap?
Although the price cap a great idea in, in practice, it has a number of flaws. Here are some of the main problems with the price cap:
It could discourage households from switching - The biggest problem with the price cap is that it could actually act as a barrier to the exact thing it’s set out to achieve – saving people money on their energy bills. While capped energy prices may seem like the ideal way to prevent ‘rip-off’ energy prices, in practice, a price cap on energy rates can give energy customers a false sense of security that they’re on a good deal, when the reality is they could save much more by switching supplier. This means millions of customers will still be sat on expensive variable rate tariffs, oblivious to the fact that they’re still on a relatively expensive deal.
It could put an end to competitive energy prices - Then there’s the problem of suppliers hiking up the rates on their fixed rate deals for those active switchers who are engaged in the energy market. This could see prices bunch around the level of the cap, all but putting an end to any sort of competitively-priced deals. The number of cheap energy deals - those that cost less than £1,000 per year - dropped by 90% during 2018, falling from 77 at the start of the year to just eight by the end of it. This suggests that suppliers are willing to cut the number of cheap deals on offer to make up for money they might lose as a result of the price cap. This will not only see customers worse off, it could also push even more small suppliers out of business, meaning we have an increasingly less competitive energy market.
It won’t help everyone who’s on an expensive rate - The price cap only affects standard variable rate tariffs, which means it won’t be any use to anyone on an expensive fixed rate deal – which reinforces the point that the only way to make real savings on your energy bills is to compare rates and switch to a better deal. There are currently loads of fixed rate deals that currently cost less than the proposed price cap and could save you money whether you’re on a standard, fixed or variable rate.
How to switch energy supplier
How to switch energy supplier
How to switch energy supplier with UKPower. Simply enter your postcode and we'll compare energy prices from a range of suppliers. You then choose the one you prefer and we'll take care of the rest.
If you really want to take control of your utility bills, and cut the amount you pay each year, then you need to switch energy supplier. To get started, simply enter your postcode in the box on the right. Even if your current deal comes with an early exit fee, it’s worth comparing deals as you might still find one that saves you more money in the long run.