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The Energy Price Cap Explained

What is the energy price cap?

Known as the Domestic Gas and Electricity (Tariff Cap) Act, the energy price cap is an act of parliament that limits the maximum price that suppliers can charge their customers for standard variable energy tariffs.

The cap took effect from midnight 1st January 2019 and is expected to last until 2023. Experts believe it will reduce the energy bills of as many as 11 million households and is administered by the energy market regulator, Ofgem.

What’s the purpose of the price cap?

The energy price cap was put in place as a method of alleviating the loyalty penalty — a term given to the premium paid by customers who faithfully remain with the same energy supplier for years.

Customers who are less likely to be engaged in the energy market, like the elderly or those on low incomes, tend to pay more for their gas and electricity by staying on the same tariff. That’s because many people are automatically rolled over to pricey default tariffs when their fixed-rate deal expires.

The energy price cap protects these customers from paying extortionate utility bills.

How high is the energy price cap?

From 1st April to 31st September 2022, the default tariff cap is set at £1,971 per year for a typical dual fuel customer paying by Direct Debit. This is an increase of 54% from the period of 1st October 2021 to 31st March 2022.

However, the £1,971 figure isn’t necessarily the maximum that customers will need to pay. The price cap limits the amount that suppliers can charge per unit — not the total bill. The details of what is actually limited by the price cap are as follows:

  • Unit charge per kWh for electricity-only customers paying by direct debit: 28p
  • Unit charge per kWh for gas-only customers paying by direct debit: 7p
  • Daily standing charges for electricity-only customers: 45p
  • Daily standing charges for gas-only customers: 27p

The energy price cap is also subject to regional variations, meaning you could be capped higher or lower depending on your location.

How is the cap set?

The Office of Gas and Electricity Markets (Ofgem) is the regulator for the energy industry. They set the energy price cap based on a number of factors, including the wholesale cost of energy, network costs, operating costs, policy costs and prepayment meter costs.

Ofgem is committed to setting a fair price cap to protect energy customers. The organisation reviews the cap twice a year, in February and August.

Who benefits from the energy price cap?

The energy price cap affects those who are currently on a default variable or standard variable tariffs, as they pay some of the highest rates for energy.

The cap aims to protect those on poor value energy tariffs — whether it’s due to a lack of industry knowledge or being quietly rolled over from a previous plan — from paying too much for utilities. To find out if you’re on a default or standard tariff, you can simply check your energy bill for your tariff name and details.

Those on fixed-rate tariffs will not benefit from the energy price cap as you’re likely to be already paying a lower rate on your energy than the cap could offer.

How does the cap affect prepayment customers?

The energy price cap now covers customers on both standard variable tariffs and prepayment tariffs.

In previous years, Ofgem had set a separate prepayment price cap to protect those who hadn’t yet switched to a standard direct debit tariff. However, the two price caps were combined in January 2021.

How much will I save with the price cap?

Ofgem estimates that the introduction of the energy price cap has helped to save customers roughly between £75 and £100 a year on their utility bills. Of course, the price cap has increased dramatically in the last year as wholesale gas and electricity prices have gone up.

Although the energy price cap is designed as a safety net for those who stay with the same supplier, you should still compare the latest energy tariffs to find the best deal available to you.

At Business Electricity Prices, we help thousands of customers every year pick the right energy tariff by comparing the latest deals from a wide range of trusted energy suppliers.

Use our free comparison tool to find out which deal is right for you, or give us a call on 0800 690 6008 to speak to one of our energy experts for more information.

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