What is The Energy Price Cap?

How Does it Work and How Will You be Affected?

The energy regulator Ofgem has just confirmed an 80% rise to the energy price cap from 1 October 2022. What does this mean and how does it work? 

Well, the price cap was introduced in 2019 by regulator Ofgem with the aim of preventing households on variable energy tariffs – as opposed to fixed tariffs – from being ripped off.  

It does this by setting the maximum amount that energy suppliers are permitted to charge for each unit of gas and electricity that you use. It also sets a maximum daily standing charge, which is the cost of actually getting the power to your household. 

To calculate the cap, Ofgem refers to the wholesale price of energy in international markets, and in recent times, prices are fluctuating wildly; rising more than three times the level they were at the start of the year. One reason for this is due to the Russia-Ukraine conflict, with Russia standing as a major energy supplier to the international markets. 

Given this, Ofgem has recently announced plans to change the way the price cap works, with the cap being set to change every three months rather than six months. This has led to fears that bills will increase four times a year, with the first increase predicted to be 80% in October, taking a typical bill to £3,549. 

It should also be noted that the price cap is set differently depending on payment method: 

→ Direct debit – the price cap is £3,549 on typical use from 1 October 2022. 

→ Cash, cheque or quarterly direct debit – the price cap is £3,764 on typical

use. 

→ Prepayment – the price cap is £3,608 a year. 

How Do I Know If I’m On a Price-capped Tariff?

While the price cap affects the vast majority of energy consumers, it does not apply to everyone:

→ It does not apply if you are on a fixed-term energy tariff or if your tariff is

exempt from the price cap. 

→ It does apply if you are on a default energy tariff. This is a tariff that you don’t 

actively switch to and is generally known as a standard variable tariff.  

If you are unsure what tariff you are on, contact your energy supplier. If you have come to the end of a fixed term contract, it is likely that you are on a standard variable tariff or will be moved to one if you do nothing. If your supplier has recently gone bust, it is likely you are on a standard variable tariff.

Are There Any Alternatives to the Price Cap? 

Given that energy costs have reached a crisis point, there are no tariffs meaningfully cheaper than price-capped tariffs. 

However, one potentially cheaper alternative is a fixed rate tariff, with some energy firms like EDF allowing existing customers to switch to this type of tariff. As a general rule, fixes are typically only worth considering if you are an existing customer and if you are offered a year’s fix at no more than 145% above your current price-capped tariff. Check out MSE’s ‘Should you fix?’ calculator for more information. 

What Can I Do About my Energy Bills? 

Unfortunately, nothing much can be done about high energy bills except making an effort to reduce energy consumption. A top tip is to install a smart meter – which is free-of-charge from your energy supplier – to help identify which of your appliances are using the most energy/money. 

What Can I do if I am Struggling with Rising Energy Costs? 

The Government has announced an Energy Bills Support Scheme to help people deal with rising bills. Under the scheme, all domestic electricity customers in Great Britain will get £400 non-repayable credit automatically added to their accounts during the six months starting from October.

In addition, £650 will be paid to more than eight million low-income households who receive benefits or tax credits, £300 to pensioner households and £150 to disabled people. 

However, if you still cannot afford to pay your energy bills then contact your energy supplier. Ofgem regulations dictate that a reasonably affordable payment plan must be offered to all consumers.

Another option for vulnerable families is to claim help through the Household Support Fund, the Warm House Discount scheme, and hardship funds run by energy companies. 

What About Prepayment Meters? 

A separate price cap applies to those using prepayment tariffs. This cap is also set to change, with the cap being reviewed four times a year rather than twice. As with the variable tariffs, the Government will add £400 to your meter balance, and if you are still struggling to top up, emergency credit can be requested.