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06 Aug 2021
Adam Bate Confused.com

The energy price cap 2021: what does it mean for you?

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Your energy prices could rise if you’re on your provider’s standard or default energy tariff. We look at ways you can save on energy this winter.

Person calculating energy bill

In January 2019 default tariff energy prices in the UK were capped for the first time by the energy regulator, Ofgem.

This was so households weren’t paying extortionate amounts for energy.

But this winter, household energy bills could rise to the highest price yet due to the rising cost of fossil fuels.

Energy tariffs can be confusing at the best of times, so here we explain the energy price cap and what it means for you.

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What is the energy price cap?

Since 2019, the energy regulator Ofgem has imposed a default energy price cap on energy prices for customers on a default or standard energy tariff.

In 2017, Ofgem also brought in a price cap for those with prepayment meters. 

Each price cap is designed to protect customers from paying a high price for their energy.

The price cap changes are announced twice a year. Once in April for spring and summer, then again in August for winter.

In April 2021, the default energy price cap increased by £96 to £1,138. October 2020’s limit was £1,042.

In October 2021, the default energy price cap will rise to £1,277,  increasing household energy costs by £139 per year.

The price cap for those with prepayment meters will also increase by £153 from £1,156 to £1,309. 

This is the largest rise in energy prices yet, affecting around 15 million people.

Ofgem has said this is due to an unprecedented increase in the wholesale cost of fossil fuel.

Jonathan Brearley, the Ofgem chief executive, said:

“When legitimate costs of supplying energy increase, this needs to be reflected in the price cap,”

“Without this, companies would be unable to continue to supply energy to their customers.

"But this cap only applies to customers who are on their provider’s standard or default energy tariff, or if they’re on a prepayment meter."

And as Ofgem itself points out, most households are likely to be able to pay even less for their energy every year by switching to a more competitive fixed-term deal.

 

How does the energy cap affect me?

The price caps don’t limit how much you’ll pay for your energy bills, just the rates you pay for your energy.

So if you start using more gas and electricity, you’ll still be charged more per month for the extra you’re using.

If you’re on a fixed rate tariff, you won’t be affected by the energy cap.

Most fixed rate tariffs are already charged at a rate below the cap. You should keep a close eye on the end date of your fixed term, though.

When it ends, you’ll be moved to the standard variable rate and the energy cap will affect you from this point on.

If you’re on a default tariff and the cap is lower than your current cost per unit of energy, your supplier will have to lower their rates.

In the same way, if the cap levels go up, your supplier is likely to increase your rates to these levels, so you'll be charged more.

 

What is the Prepayment Meter Price Cap?

A prepayment meter is a kind of pay-as-you-go system for energy. A little like a pay-as-you-go mobile phone.

Ofgem introduced the Prepayment Meter Price Cap in 2017.

According to Ofgem, there are around four million households in the UK with a prepayment meter. 

In April this year, the Prepayment meter price cap rose by £87 to £1,156.

In October this will rise again by £153 to £1,309.

The new price cap could affect you if you have a prepayment meter. If you want to switch to a credit meter it could be worth speaking to your energy supplier to see if you’re eligible.

Or if you’re in rented accommodation, it might be worth chatting to your landlord to see if they’re willing to switch.

 

What is the current energy price cap?

The two price caps Ofgem have set are: 

Default tariff price cap - Introduced on 1 January 2019
Default tariff price cap - Introduced on 1 January 2019 Covers customers on standard variable tariffs (the supplier’s ‘default’ tariff)
Prepayment price cap - Introduced on 1 April 2017
Prepayment price cap - Introduced on 1 April 2017 Covers customers on a variable prepayment tariff (sometimes known as ‘pay as you go’)

The current levels of the respective price caps are:

Default price cap
Default price cap £1,288 per year from 1 October 2021
Prepayment price cap
Prepayment price cap £1,309 per year from 1 October 2021

 

How is the energy price cap calculated?

Ofgem, the regulator for the energy industry, sets the energy price cap.

They base the cap on a few different factors. Some of them are:

  • The cost of fossil fuels

  • Operating costs – for example, the cost for suppliers to send out tradespeople to fit smart meters or conduct general maintenance work

  • Network costs – this covers building, operating and maintaining the pipes and wires that supply energy to your home

  • Policy costs – for example government schemes to reduce emissions.

To see the full list of factors, visit the Ofgem website.

They review the price cap twice a year, taking into account these factors and more.

 

Is the energy price cap a good thing?

Undoubtedly the energy price cap is a step forward in that it protects millions of energy customers from paying extortionate prices for their energy.

Most of these customers have never switched their energy supplier and might be unaware of the options available.

Since these customers include the less well off, the elderly and the less able, any measures to protect them against rising prices must be a positive step.

However, the price cap by definition is the maximum that a customer can pay for their energy. This means that there should be many ways of paying far less for that same energy.

 

 

How can I pay less for my energy?

Ofgem recommend that even if the price cap applies to you, that you should still shop around to make sure you are saving as much money as you can.

There are likely to be offers that could save you even more money on your gas and electricity.

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