In October, the price cap will increase to £3,549 as a result of the rising cost of fossil fuels. For people on their supplier's default or standard variable rate (SVR) tariff, this means energy bills could increase by £1,578 per year. Here we explain the energy price cap and what it means for you.
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 variable rate energy tariff.
In 2017, Ofgem also brought in a price cap for those with prepayment meters.
Each price cap is intended to protect customers from paying a high price for their energy.
But now, wholesale energy prices are high and this is reflected in the price cap. So even with the price cap in place, it's likely everyone could see their energy costs increase.
How has the price cap changed this year?
In October 2022, the default energy price cap will rise from £1,971 to £3,549 increasing household energy costs by £1,578 per year.
The price cap for those with prepayment meters will also increase by £1,591 from £1,309 to £3,608.
This is an increase of 80% for the energy price cap.
Ofgem has said this is due to an unprecedented increase in the wholesale cost of fossil fuel.
In previous years, the price cap happened twice a year. Once in April for spring and summer, then again in August for winter.
Now, Ofgem are bringing in a quarterly price cap from October which should be announced every 3 months, rather than every 6 months.
The wholesale prices of energy are rising and falling constantly. So a quarterly price cap could help people benefit from falling wholesale energy prices more quickly.
Jonathan Brearley, the Ofgem chief executive, said:
"We know the massive impact this price cap increase will have on households across Britain and the difficult decisions consumers will now have to make. I talk to customers regularly and I know that today’s news will be very worrying for many.
“The price of energy has reached record levels driven by an aggressive economic act by the Russian state. They have slowly and deliberately turned off the gas supplies to Europe causing harm to our households, businesses and wider economy. Ofgem has no choice but to reflect these cost increases in the price cap.
"The Government support package is delivering help right now, but it’s clear the new Prime Minister will need to act further to tackle the impact of the price rises that are coming in October and next year. We are working with ministers, consumer groups and industry on a set of options for the incoming Prime Minister that will require urgent action.
"The response will need to match the scale of the crisis we have before us. With the right support in place and with regulator, government, industry and consumers working together, we can find a way through this."
How does the energy cap affect me?
The price caps don’t limit how much you pay for your energy bills, just the rates you pay for your energy.
So if you start using more gas and electricity, you’re still charged more per month for the extra you’re using.
If you’re on a fixed rate tariff, you shouldn't be affected by the energy cap.
Most fixed rate tariffs are already charged at a rate below the cap. Usually, when your fixed term ends, you’re moved to your supplier’s standard variable rate and the energy cap will affect you from this point on.
Now, due to the rising prices of wholesale energy the prices of fixed rate deals are, on the whole, more expensive than a supplier’s standard variable rate tariff. So it’s worth keeping this in mind if you’re approaching the end of your fixed rate contract.
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 could be charged more.
The energy situation means that there aren’t many options for switching energy suppliers for savings. For now, it could be worth staying on your supplier’s standard variable rate, rather than switching to an expensive fixed rate tariff that could be in place for 1-3 years.
It’s also a good idea to keep an eye on the energy market so you know when energy deals are available again, you can do this by getting switch ready.
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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 October, the Prepayment meter price cap will rise by £1,591 to £3,608.
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.
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.
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?
At the moment, the energy market is unpredictable and there aren't many options for switching. But there are still ways you can save on energy, for example:
- Turn down your thermostat
- Never leave appliances on standby
- Wash your clothes at a lower temperature