Energy price cap: what does it mean for consumers?

In this guide, you’ll learn all you need to know about the energy price cap:

  • What is the energy price cap?

  • Why is it necessary?

  • What is the current level of the energy price cap?

  • Will I save money with the energy price cap?

  • How long will the energy price cap last?

What is the energy price cap?

The energy price cap – also referred to as the ‘default tariff cap’ or the ‘safeguard tariff’ – is a limit to the rates that energy suppliers can charge customers who are on standard variable tariffs or other default tariffs. It’s not a cap on your overall energy bill, which is determined by the amount of energy you consume, and it doesn’t lock rates, which means the cap price can rise or after subject to Ofgem reviews. The Ofgem energy price cap simply caps the unit rate and standard daily charges that energy suppliers can charge people on default tariffs. The cap came into force in January 2019. 

Why is the energy price cap necessary? 

The Ofgem price cap is intended to set limits to household energy bills to avoid customers shouldering the burden of rising energy prices. It’s also designed to counteract the so-called “loyalty penalty” whereby customers who have remained loyal to the same energy supplier have been rolled on to pricey default tariffs. Many energy consumers are confused by the process of switching energy suppliers, so end up paying over the odds for their electricity and gas because they’re uncomfortable changing energy supplier.

The price cap is intended to be a temporary measure to ensure prices reflect underlying energy costs while longer-term reforms, such as smart metering, are rolled out to ensure fairer energy prices in the future. The cap’s primary aim is to help prevent nervous customers from being squeezed by default tariffs, which is why it’s been targeted specifically at customers on standard variable tariffs and default tariffs. 

What are default tariffs and standard variable tariffs?

Default tariffs are energy suppliers’ basic tariffs. They’re almost always poor value for consumers because they’re the most expensive tariffs available. Most of those who end up on this tariff do so after moving to a new home having failed to agree a new tariff with their energy supplier or because they've allowed their fixed rate contract to end without seeking a replacement.

Standard variable tariffs are a type of default tariff whose price-per-unit is linked to the current wholesale price of electricity and gas. If energy prices rise, your bills do too. On the other hand, if – and when – energy prices fall, then you should pay less in turn. The government cap on energy bills places a limit on the price that suppliers can charge consumers on default tariffs like the standard variable tariff. 

What is the level of the energy price cap? 

The energy price cap is currently set at £1,162 per year for standard tariffs. The current cap runs from 1st April 2020 to 30th September. From 1st October 2020, the price cap is set to fall even further – by £84 – to just £1,042 per year, its lowest level since the cap was introduced in January 2019.

Note, a separate cap applies if you’re on a prepayment meter – this is currently set at £1,164 a year, and will fall to £1,070 from 1st October.

Note, this doesn’t mean your bill will end up being £1,162 (or £1,042). That’s because the cap is on the per-unit price of your energy – in other words, the price for each kWh of electricity and/or gas you consume in addition to the daily standing charge. The overall figure represents the average energy bill, which is determined by Ofgem’s Typical Domestic Consumption Values (TDCVs) and is based on a dual-fuel customer paying separate electricity and gas bills by direct debit. That means if you use more energy than the average domestic household, you’ll end up paying more than £1,162 per year, or £1,164 if you’re on a prepayment meter. 

How often does the Ofgem price cap level change?

The energy price cap is updated twice a year: February (coming into effect on 1st April) and August (coming into effect 1st October). The cap itself was introduced through an Act of Parliament, The Domestic Gas and Electricity (Tariff Cap) Act, which came into effect in July 2018.

Here's how the cap has changed over time:

PeriodPrice cap level+/- change (%
1st January – 31st March 2019£1,137N/A
1st April – 30th September 2019£1,254+£117 (+9%)
1st October 2019 – 31st March 2020£1,179 -£75 (-6%)
1st April – 30th September 2020£1,162-£17 (-1%)
1st October 2020 – 31st March 2021£1,042 -£84 (-11%)

Why does the Ofgem energy price cap rise and fall? 

Ofgem needs to review the energy price cap at regular intervals because energy costs can fluctuate quite widely – both up and down. This allows Ofgem to consider changes in costs to energy suppliers, from changing wholesale energy prices to network charges. After the information has been reviewed, Ofgem determines whether the price cap needs to be increased, reduced, or stay the same. 

Will I save money with the energy price cap? 

The answer is ‘definitely maybe’. If you’re on a standard variable tariff, then the Ofgem energy price cap will save you around £75 a year. On the other hand, standard variable tariffs often represent poor value for money – with or without the energy cap in place – when compared to other deals available in the marketplace. For example, even with the cap in place, standard variable tariffs can cost between £200 and £300 more per year than more competitive energy deals on offer. 

If I’m on a fixed rate tariff, does the Ofgem energy cap affect me? 

No, the energy price cap only affects people who are on default/standard variable tariffs, so if you’re on a fixed rate tariff or another type of energy plan, such as an Economy 7 plan, you won’t be seeing any changes in your monthly bills. Not that it matters – you’re almost certainly paying a much lower rate for your energy than the price cap would guarantee, so there’s no need to worry about missing out on potential savings. 

If I receive the Warm Home Discount, does the energy price cap affect me? 

The Warm Home Discount has no influence on whether you’re eligible for the energy price cap, so the answer is yes – if you’re on a standard variable tariff. If you’re not sure which tariff you’re on, check your bill for details or contact your energy supplier for clarification. They should be able to confirm whether you’re eligible for the Ofgem price cap. 

How is the Ofgem energy price cap calculated? 

Ofgem, the energy industry’s regulator, determines the price cap based on the latest cost estimates for suppliers. These are affected by a wide variety of factors, including networks, tax, environmental and social programmes, and – of course – the wholesale cost of energy. In addition, Ofgem considers additional costs incurred by the supplier to ensure they’re still able to make a profit before the energy price cap is set. 

How long will the energy price cap last?

The price cap is set to last until 2023. At this point, Ofgem expects that other initiatives, such as smart meters and faster switching times, will enable consumers to get fairer deals on their energy prices. If this is the case, then the energy price cap will be removed. However, it could also be removed sooner than that, or extended to run beyond 2023.

If my energy prices are capped, does that mean I don’t need to switch? 

No, even if you’re covered by the Ofgem price cap, you should still strongly consider switching energy provider. This is because the price cap for energy is still likely to set your default tariff at a rate higher than standard fixed rate energy plans. It’s also worth remembering that the Ofgem price cap doesn’t fully protect you from price changes, because the cap is raised or lowered at regular intervals. With this in mind, it’s probably a good idea to take out a fixed rate plan to protect yourself against fluctuating energy prices. 

Last updated: 7 August 2020.

Ben GallizziEnergy Expert - Oct 23rd 2019