Ofgem’s energy price cap, which was first implemented on 1 January 2019, is designed to set a limit on the amount energy providers can charge people on their default tariffs. In this guide we cover what the price cap is and assess whether it will have a positive or negative impact on your energy bills.
In this guide you'll find answers to questions including:
What is the energy price cap designed to achieve?
When will the price cap level change?
How does the energy price cap work?
What does the government energy price cap mean for me?
Can I see the price cap on my energy bill?
Does the price cap transfer if I move home?
Are there disadvantages to the price cap?
Do I need to take any action to benefit from the price cap?
The rising cost of energy in the UK in recent years led to the UK government directing energy regulator Ofgem to exert some control over prices. The result was the energy price cap, a limit to the amount that energy companies can charge customers on default tariffs. There’s also a price cap on prepayment meter charges.
The first energy price cap was set in 2017, but only applied to prepayment tariffs. In 2019 it was followed by the default tariff price cap. Both caps exist to make energy prices fairer and less costly. The price cap level, which came into effect in October 2020, is currently £1,042 – the lowest level since its introduction. The prepayment tariff cap level is £1,070.
It’s important to note that the energy price cap doesn’t apply to all energy customers – solely those on the types of tariffs mentioned above. In the case of the default tariff price cap, that’s roughly 11 million UK households, including those who have never switched providers. It also helps cover those who transitioned to a default or variable tariff at the end of a fixed-term deal.
An energy price cap won’t automatically lower your bills. The cap applies to the charges for each unit of energy, as well as a maximum charge per day for standing charges. The price cap is reviewed every six months and rises or falls depending on Ofgem calculations and market rates.
Price cap levels are set by Ofgem in February and August each year, taking effect a few months later. On 1 October 2020, the price cap fell by £84, due to lower wholesale costs.
The cap will fluctuate according to wholesale market conditions. When energy prices go down, caps fall accordingly. When wholesale prices go up, the price cap will too – current market conditions suggest the cap will probably rise when it’s next announced in February 2021.
Ofgem was all set to end the prepayment price cap at the end of 2020, but in August 2020 it rolled the prepayment price cap into the default price cap, which is set to end in 2023. Ofgem’s reasoning is that faster switching times and the rollout of smart meters will give UK households better access to good deals – note that this deadline is not set in stone and may change.
The energy price cap doesn’t place a cap on your total energy bill. It simply puts a limit on the unit price of energy, measured in kWh. It also places a limit on energy standing charges. These include the additional costs associated with supplying your home with gas and electricity. The current energy cap is based on a ‘typical’ household consumption: 3,100 kWh electricity (or 4,200 kWh for multi-rate plans such as Economy 7), and 12,000 kWh gas. If you use more gas and electricity than these benchmark figures, your bills will be higher than the price cap to reflect the extra energy you’re using.
Customers on fixed rate tariffs won’t be impacted by the energy cap. Fixed tariffs are charged at rates below the cap. However, be sure to keep an eye on the end date of your fixed term. After this date, you’ll be moved over to the standard variable rate if you don’t act to switch to a new tariff or supplier. At that point, the rate could be higher than the default tariff price cap, which is where it would start to impact you.
If the cap is lower than what you’re being charged for the cost per unit of energy, your supplier must lower these rates accordingly.
You could also be impacted by the energy price cap if you receive the government’s Warm Home Discount, or if you’re on a prepayment tariff. In all cases, remember that your bill will still depend on your energy consumption.
If you use a prepayment meter to receive energy in the home, you could benefit from the prepayment tariff price cap. This has historically been reviewed independently to the default tariff – currently, the prepayment tariff price cap is £1,070 compared to the default tariff price cap of £1,042.
From March 2021, however, the prepayment tariff price cap will be rolled into the default tariff cap, which is reviewed and amended every six months (March and October). This means prepayment meter users will continue to be protected for as long as the default tariff cap remains in place.
If you’re on your supplier’s default or standard variable tariff and meet eligibility requirements, this type of energy price cap will apply to you. The default tariff cap is also called the safeguard tariff. It limits the standing charges and unit rate for energy. Currently, the default tariff cap is set at £1,042, and will apply until 31st March 2021.
Some suppliers do show the price cap on energy bills, but this is at their own discretion. However, you should be informed by the supplier if your tariff is changed for any reason. This includes switching tariffs from a fixed to a variable rate. If you’re not sure whether the price cap applies to you, it’s a good idea to contact your supplier for clarification.
If you’re in the process of moving house and decide to stick with the same supplier and tariff, the price cap will continue to apply. However, energy rates can vary by region so it’s a good idea to see if you could switch to a better deal when you move. This is particularly true for those on standard variable tariffs since there won’t be any exit fees.
Moving to a different home is also a good time to see if you could switch from a prepayment tariff to a fixed tariff using a regular meter. Regular ‘credit’ meters give you access to a wider range of better value deals.
Ofgem’s price cap is designed to prevent energy suppliers from raising their prices without limit. What’s not to like? There are a few reasons why this scheme has received some criticism.
A cap discourages competition. When customers believe that their bills are protected by financial safeguards, they’re less likely to switch suppliers. This in turn discourages suppliers from competing for business with cheaper deals or other incentives.
You can save more by switching. Even with the price cap applied, you can find far better fixed term deals by shopping around for the best tariff.
There are other factors that impact bills. Customers may feel a sense of complacency about their tariffs due to the energy price cap. However, more goes into your bills than the per unit rate and standing charges. Bills are impacted by distribution costs, wholesale costs and other issues, which you also need to pay attention to when finding the best deal. Energy price comparison sites are the best way to look at the bigger picture.
No, your supplier will automatically apply the caps if you’re eligible for price protection with your current tariff. It’s the supplier’s job to tell you if your tariff is protected. It must also tell you if your tariff has changed in any way, or if it’s no longer available.
If you’re on a poor value deal, the price cap will work in your favour to save you money. It’s put in place to make sure that UK suppliers pass on savings from falling energy prices to their customers.
However, the bottom line is that you should still always compare prices to find out if you’re on the best tariff for your household’s needs. Most UK households can save money by switching to a different supplier, with the best deals falling well below the price cap level. Getting started is easy; you can simply enter your postcode into an online tool to find the best rate available.