The energy price cap is a limit on how much suppliers can charge you, which sounds like a good thing on the surface.
However, it may not be saving you money in the long term. Why? Let’s take a look.
What is the energy price cap?
Introduced in January 2019, the energy price cap is a limit on how much suppliers can charge you per kWh of electricity and gas you use.
It applies if you’re on a ‘standard variable’ or ‘default’ energy tariff. It doesn’t apply to non-default or renewable tariffs, which are usually cheaper.
How is the price cap set?
The cap is set by Ofgem and suppliers can’t put their prices above the set level. This is adjusted twice a year, at the beginning of April and October.
The level reflects the prices suppliers have paid in the previous six months for the energy sold to households. So, if the cost to suppliers in the previous six months was low, the price cap will be low. If the cost is higher, the price cap will be higher.
How much is the energy price cap?
The price cap seen in the media is calculated for a ‘medium’ consumption house paying for their energy by monthly direct debit. It’s averaged across the whole of the UK.
Currently, no household should be paying more than £1,042 a year for their energy consumption.
However, from 1 April 2021, the price cap will increase by £96 to £1,138 for default tariff customers, and by £87 to £1,156 for prepayment meter customers.
Why is the price cap necessary?
Before the cap, suppliers were free to charge whatever they wanted, so many pushed up their prices. However, it’s not all good news.
What’s the problem?
Currently, the price gap is very low, reflecting the drop in energy consumption that occurred in the first half of 2020, due to the impact of COVID-19. Of course, as demand falls, so do prices.
Since the last cap was set, the price suppliers have paid has risen. However, suppliers have responded by increasing the price of their non-default tariffs. These are not only exempt from the cap, but they’re usually around £200 cheaper than standard tariffs.
Now, wholesale prices have risen, which means the price cap will increase too. This will, in turn, push the bills up for millions of homes up and down the country.
The price cap trap
These non-default deals are normally much cheaper than the default tariffs governed by the cap, but have recently begun to look less competitive relative to the price cap.
This is where the price cap can cause confusion. If you’re on a ‘default’ tariff, the current relatively small savings could put you off switching.
But, the price cap will rise by almost £100 for a typical home in April 2021, as recent price increases on the energy markets kick in. This means that customers on standard variable tariffs in April are likely to see the amount they pay increase too.
On a default tariff?
If you’re on a ‘default’ or ‘standard variable’ tariff, you’re likely paying too much. Even if your projected savings look to be less than £100, that is still money you could be using for other things. If you’re in that situation, you could be better off switching.
Come April when the new price cap increase takes effect, you’ll feel the benefits.
Want to make the switch?
Switching energy supplier could help you save hundreds a year. Why not choose a supplier backed by 100% renewable energy? You’ll not only put more money in your pocket, but you’ll be doing your bit for the planet too.