Energy Price Cap Guide 101 | What Is It and What Does It Mean for Your Bills?

Wondering what the energy price cap is and whether it applies to you or not? You have come to the right place.

Following the energy crisis of 2021, the rising cost of electricity and gas has dominated the headlines for the past 12 months. Unfortunately, the hike in wholesale prices is passed on to the consumers through the sudden change in the energy price cap.

The energy price cap, by definition, is the maximum month that a supplier can charge a household on “default tariffs.” Even though the energy price cap provides a balance in the prices and saves the consumer from overpaying the suppliers, the cost ultimately depends on the amount of electricity or gas the household uses.

On 01 October 2022, the energy price cap was revised from £1,971 to £3,549 annually for those on standard variable tariffs and from £2,017 to £3,608 for prepayment tariffs. This means that a house in the UK with typical energy usage (electricity and gas) will pay a rate of approximately £2,500 every year till April 2023. Therefore, for a typical consumer paying via direct debit, the energy price cap roughly equates to 34p per kWh for electricity and 10p per kWh for gas, or 46p and 28p per day, respectively. However, remember that the energy cost rate can vary depending on your area and region.

The energy price rate guarantee is anticipated to increase to £3,000 annually and will continue from April 2023 till March 2024. This article will teach you everything there is to know about energy price cap. Keep reading to learn more!

What Is the Energy Price Cap?

Introduced by Ofgem in January 2019, the energy price cap was established to regulate energy charges in Great Britain, ensuring that the supplier doesn’t overcharge the customers. In simpler words, the energy price cap sets the maximum amount that the companies can charge consumers on the “default tariffs” of electricity and gas. “Default Tariffs” is the most basic energy package offered by the energy suppliers and comprise a daily standing charge that you will be paying for the connection to the grid. In fact, according to Ofgem (Office of gas and electricity markers), the energy price cap helped households on default tariff in saving £100 to £75 every year on their bills.

However, note that the energy price cap doesn’t limit the amount of your total bill but reflects the everyday charges. This means that if you use less energy, you will pay less, and if you use more energy, you will pay more. The energy price cap affects consumers in Wales, Scotland, and England and will be reviewed and revised every four months (January, April, July, and October). Ofgem sets the energy price cap rate in consideration of the following factors:

  • The cost of fossil fuels.
  • The policy cost – the government schemes to reduce emissions.
  • The cost of the network – this includes the cost of maintaining wires and pipes that supply energy to your property.
  • The operating cost - the price energy suppliers, pay to send professionals to instal smart metres or perform regular maintenance

What Does Energy Price Cap Mean for Your Bills?

Prior to the February price cap announcement, a poll on Uswitch's Twitter account found that 63% of consumers didn’t know how the energy price cap would affect their electricity and gas bills. Furthermore, research on the October energy price cap rate showed that despite the fact that the price cap was prominently covered in the news as part of the UK's cost of the living problem, households were still underestimating the impact of a high price cap on their bills.

It's vital to keep in mind that the energy price cap is based on unit rates—the real price that is continuously changing. Simply put, the "cap level" is based on the average use of dual-fuel the consumer pays by direct debit. This implies that if you use more energy or live in a large house, you will end up paying more than the standard energy price cap amount. In other words, the energy price cap won’t cut or minimize the cost of someone’s total bill but will only limit the price a supplier can charge per kWh for gas and electricity consumption.

Since the energy price cap was implemented in January 2019, the energy suppliers have made sure to set the default tariff price rates close to the maximum cap rate.

Note that the energy price cap covers only prepayment and standard variable tariffs. These tariffs are usually the most expensive options a supplier provides. So, if you haven't changed energy providers in the past or dropped off a fixed energy plan, there’s a high chance that you are on any of these tariffs in an energy market.

However, because they are not permitted to increase the rates of their standard variable plan, providers have raised the prices of their fixed rate plans as a result of the volatility in the energy market. This indicates that while a typical variable tariff at the soon-to-be-implemented energy price cap level of £2,500 is very expensive, it will probably be less expensive than a fixed tariff rate.

What You Need to Know About Energy Price Cap?

The Energy Price Guarantee protects consumers from hefty energy bills by limiting the amount that the suppliers can charge per unit of electricity and gas used. This helps bring the energy bill down to £2,500 annually in Great Britain and £1,950 annually on the Northern Island. Listed below are some important facts about the Energy Price guarantee.

  1. On 01 October 2022, the energy price cap rate was increased by 27%, taking the £1,971 cost of a typical energy bill to £2,500 a year. However, there’s no fixed cost, and the bill can fluctuate depending on how much energy you use.
  2. The energy price cap will rise by 20% in April 2024 to £3000 per year and will remain the same till 31 March 2024.
  3. You will pay £273 per year even if you don’t use energy.
  4. According to the Chancellor’s announcement for the £400 flat payment, you will be receiving a £67 to £66 reduction each month on the bills between October 2022 and March 2023.
  5. The average dual-fuel direct debit rates are as follows:

 

Electricity

Gas

Unit Charge

34p/kWh

10.3p/kWh

Standing Charge

46.4p/day

28.5p/day

Is Energy Price Cap a Good Thing?

Protecting millions of energy consumers from paying exorbitant prices for energy usage, overall, the energy price cap is a good thing. In consideration of the fact that most customers (especially the elderly, less well off, and less able) are unaware of their energy supplier and never plan to switch them for better rates, the energy price cap is a positive step as it protects them from the ever-rising prices.

Wrapping Up

Are you finding it difficult to pay your energy bills? If so, it is important that you stay informed about the energy price cap and contact your supplier so that you don’t fall into arrears and aren’t at risk of cutting off the electricity and gas supply. According to Ofgem rules, it is the duty of the suppliers to create a payment plan that reflects your financial needs.

Furthermore, in case you are on a prepayment meter and are unable to top up, request emergency credit. On the other hand, if you are drowning in debt with household bills, we recommend reaching out to a debt charity for free financial advice.

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