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The Energy Price Gap Explained
TABLE OF CONTENTS
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?
Currently, the default tariff cap is set at £1,179 per year for a typical dual fuel customer paying by Direct Debit. This rate is set to decrease by £17 in April 2020 to £1,162.
However, the £1,179 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: 17p
- Unit charge per kWh for gas-only customers paying by direct debit: 4p
- Annual standing charges for electricity-only customers: £83
- Annual standing charges for gas-only customers: £94
- Annual standing charges for dual fuel customers: £177
Also, the energy price cap is subject to regional variations, meaning you could be capped higher or lower depending on your location.
|Region||Price Cap (For average dual-fuel usage)|
|North Wales and Merseyside||£1,158|
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 protects 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?
For prepayment customers — those who are on a prepayment tariff and have prepayment meters installed — there has been a separate price cap in place since 2017. In the same way as the energy price cap, the prepayment cap was developed to prevent overcharging for energy.
This cap is also reviewed twice per year, and as of October 2019, the level was reduced from £1,243 to £1,217.
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, this only affects those who maintain their current level of energy use — those who use more energy than normal would not necessarily save money with the introduction of the price cap.
Although the energy price cap is designed as a safety net for those who stay with the same supplier, you can save a lot more on your utility bills by switching to a new tariff.
At Business Electricity Prices, we help thousands of customers every year pick the right energy tariff by comparing the best deals from dozens of 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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