What is the Energy Price Cap?

It is designed to ensure that households are not overcharged, especially those on standard variable tariffs. The cap primarily affects unit rates and standing charges but does not cap the total bill, which depends on usage.

Here’s a detailed breakdown of how the energy price cap works and what it means for consumers:

How the Energy Price Cap Works

The price cap sets a maximum price per kilowatt-hour (kWh) for gas and electricity, along with a cap on standing charges (a daily charge for being connected to the energy network). It applies to customers on default or variable tariffs, which are often more expensive than fixed-rate tariffs. However, the cap does not limit the total amount you pay. Your total bill will vary based on how much energy you use, so the more you consume, the higher your bill will be.

Who Does the Price Cap Affect?

The energy price cap primarily affects:

• Households on standard variable tariffs: These are typically the most expensive tariffs and are the default for many customers after a fixed tariff ends.
• Prepayment meter customers: The cap also applies to those using prepayment meters, ensuring they are charged a fair price per unit of energy.

If you are on a fixed tariff, the price cap does not apply directly to you, as you are already locked into a specific rate.

Why Was the Energy Price Cap Introduced?

The price cap was introduced in 2019 in response to concerns that energy suppliers were charging excessive prices, particularly to vulnerable customers who hadn’t switched tariffs. It aimed to make the energy market fairer, prevent exploitation, and encourage households to shop around for better deals.

How is the Price Cap Set?

Ofgem reviews and adjusts the energy price cap every three months to reflect changes in wholesale energy prices, network costs, and government policies. When energy costs rise (as they have in recent years), the cap increases to reflect the higher costs suppliers face. Conversely, when energy costs fall, the cap is lowered to pass those savings onto consumers.

What Happens When the Price Cap Changes?

When the cap is adjusted, energy suppliers are required to adjust their prices accordingly. If the cap goes up, customers on default tariffs will see their bills increase. If the cap goes down, customers should see lower energy bills. It’s important to note that while the cap helps control prices, it does not always guarantee the cheapest rates—customers on default tariffs may still be paying more than those who actively seek out better fixed-rate deals.

Why Does the Price Cap Keep Changing?

The energy market is influenced by a number of factors, including:

• Wholesale gas and electricity prices: These fluctuate based on supply and demand, geopolitical events, and other global factors.
• Infrastructure and distribution costs: The costs of maintaining and upgrading energy networks can change, affecting the cap.
• Government policies: Renewable energy initiatives and environmental taxes also play a role in determining the price cap.

Recent rises in the energy price cap have been driven by the global surge in wholesale energy costs, which has been exacerbated by the pandemic and geopolitical events like the war in Ukraine. These factors have created a knock-on effect on household energy bills.

Is the Price Cap Enough to Protect Consumers?

While the price cap helps shield consumers from extreme price hikes, it doesn’t necessarily guarantee the lowest rates. Households can often find better deals by switching to fixed-rate tariffs, which lock in prices for a set period. It’s important to regularly compare energy tariffs to ensure you’re getting the best deal possible.

What Can You Do to Lower Your Bills?

Even with the price cap in place, it’s essential to be proactive about your energy costs. Here’s what you can do:

• Compare energy deals regularly: Even with the cap, better deals are often available by switching suppliers.
• Consider fixed-rate tariffs: Fixed tariffs protect you from rising costs and may offer more stability over time.
• Improve energy efficiency: Simple steps like insulating your home, using energy-efficient appliances, and switching to LED lighting can help reduce your overall energy usage and lower your bills.

Conclusion

The energy price cap is an important mechanism to protect consumers from unfair energy pricing, especially in a volatile market. However, it’s not a total solution. To ensure you’re paying the fairest price for your energy, it’s essential to stay informed, compare tariffs, and look for opportunities to reduce consumption.