What is the Energy Price Cap?
Ofgem introduced the Energy Price Cap on 1 January 2019. The Price Cap covers 28 million households across England, Wales and Scotland who may be on expensive variable tariffs with their energy suppliers and is designed to prevent customers from being ripped off by said suppliers. Note, the energy market in Northern Ireland is regulated by the Utility Regulator and is not affected by the Price Cap.
The Price Cap is set by Ofgem every three months, in January, April, July and October, although it has the power to amend the Cap at any point as a result of any ‘exceptional circumstances’. For the upcoming period running from 1 October to 31 December, the Price Cap will rise by 10%, meaning gas unit prices will be capped at 6.24p per kilowatt hour (kWh), and electricity at 24.50p per kWh. This means a typical use household, paying by monthly Direct Debit on a dual-fuel energy tariff, will pay £1,717 per year, which is an increase of £149 on last year. Bear in mind, however, it is only the rates that are capped, so if a household uses more fuel than a typical household, they will pay more! As mentioned, each Price Cap period only lasts three months, so it is expected it will increase again in January next year.
How is the Price Cap calculated?
There are a number of factors that are taken into account when calculating the Price Cap, although it is mainly focussed on the cost of wholesale energy - what energy suppliers themselves pay for gas and electricity - this being the largest cost incurred by them. Currently, this would work out at approximately 39% of a typical household bill.
Other considerations include operational costs such as issuing bills to customers, network costs such as building and maintenance of pipes and wiring used to supply electricity and gas, VAT which is set at 5% for energy, policy costs to support any Government schemes in relation to the environment or energy savings for households, supplier profits, payment method allowance (households that pay by quarterly Direct Debit, cash or cheque pay more), and other small unexpected costs.
Also included within the Price Cap is an ‘adjustment allowance’, which means Ofgem can include any unexpected costs in the price.
How to tell if you are on a price-capped tariff?
The Price Cap applies to tariffs you do not choose to switch to, known as ‘default’ tariffs or standard variable tariffs (SVTs). Currently, due to the recent energy crisis, approximately 85% of UK households are on a price-capped tariff, and your household will be one of them if:
· You’ve never switched your energy tariff
· You were on a fixed deal but have not chosen to switch again
· You were with a supplier that has gone bust
· You are moving home.
How long will the Energy Price Cap be in place?
Initially, the Price Cap was to be established until the end of 2020 as a minimum. The Government has now announced plans to extend the Price Cap to be in place past 2024 if necessary.
In summary:
Bills will be going up, especially in winter when more energy is used. We advise people to check their energy rates and compare them to this time last year to see what their likely monthly spend is.
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