Energy price cap: what does it mean for consumers?

The energy price cap: does it achieve what it set out to do?

You've probably heard about the Ofgem energy price cap, which came into force in January 2019 and affects standard variable energy tariffs. But what is it, how does it work, and how is it likely to affect you? Get a clearer picture of the Ofgem energy cap and find out whether it’s likely to reduce or increase your monthly bills in this guide. 

What is the energy price cap? 

The energy price cap – also known as the default tariff cap or the safeguard tariff – is a cap on the rates that energy suppliers can charge customers who are on standard variable tariffs or other default tariffs. It isn’t a cap on your energy bills, which are determined by the amount of energy you consume, and it doesn’t lock rates, which means that the cap can rise or fall after an Ofgem review. It simply caps the unit rate and standard charges that energy suppliers can charge people who use default tariffs.

Why is the energy price cap necessary? 

The Ofgem energy cap is designed to trim household energy bills, so that the effect of rising energy prices isn’t shouldered directly onto the consumer. It was also created to counteract the so-called “loyalty penalty” affecting consumers who have stuck with the same energy supplier, and as a result, have been rolled onto pricey default tariffs. Many energy consumers are confused by the process of changing energy suppliers and aren’t willing to switch, causing them to pay over the odds for their electricity and gas. 

The Ofgem price cap is only intended to be a temporary measure to ensure that prices reflect underlying energy costs. There are long-term reforms, such as smart metering, which should help to deliver fair energy prices in the future. But while these reforms are still being implemented, many people are being squeezed by default tariffs. Consequently, the energy price cap has been introduced for customers on standard variable tariffs and default tariffs. 

What are default tariffs and standard variable tariffs?

Default tariffs are basic tariffs from energy suppliers. Generally speaking, they are poor value for consumers, as they are the most expensive types of tariffs around. Most people end up on default tariffs because they have moved into a new house and not agreed on a tariff with their new energy supplier, or they may have allowed their fixed rate contract to end without seeking a replacement.

Standard variable tariffs are a type of default tariff which have a price-per-unit that is dependent on the price of energy. So, if gas and electricity prices rise, your bills will too. On the other hand, if gas and electricity prices fall, then you won’t have to pay as much for your energy. With an energy price cap, there’s a limit to the price that suppliers can charge consumers of standard and default energy tariffs. 

What is the level of the energy price cap? 

Currently, the energy price cap is set at £1,179 per year. However, this doesn’t necessarily mean that you’re going to end up paying £1,179, because it’s a cap on your per-unit rate (i.e. the price set for each unit of energy, or kWh, that you use, in addition to the standing charge), not the overall cost of your energy bills. This figure is a cap for average use, extrapolated from Ofgem’s Typical Domestic Consumption Values (TDCVs), so if you use more energy than the average domestic consumption levels, you’ll end up paying more than £1,179 per year. 

How has the Ofgem price cap level changed?

The energy price cap was introduced through an act of Parliament, The Domestic Gas and Electricity (Tariff Cap) Act, which came into effect in July 2018.

  • The price cap’s first level was set in November 2018 at £1,137 and ran from the 1st January 2019 to the 31st March 2019.

  • The second level was set in February 2019 at £1,254 and ran from the 1st April 2019 to the 30th September 2019.

  • The third level was set in August 2019 at £1,179 and will run from 1st October 2019 to 31 March 2020. 

Why does the Ofgem energy price cap rise and fall? 

Because energy costs can fluctuate fairly wildly in both directions, the energy price cap needs to be reviewed by Ofgem at regular intervals to consider changes in the costs of energy suppliers, from rising wholesale energy prices to network charges. After all this information is reviewed, Ofgem will determine whether the price cap for energy needs to be increased, reduced, or stay the same. 

Will I save money with the energy price cap? 

The energy price cap may save you money, although the exact amount that you can expect to save depends both on your usage, as well as what you’re comparing it to. For example, when compared to the amount you would need to pay on a standard variable tariff without the Ofgem energy price cap, you can expect to save about £75 a year. On the other hand, when you compare default tariffs with other competitive energy deals, you’ll still end up paying somewhere between £200 and £300 a year more, even with the price cap. 

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. In any case, you are likely to be paying a lower rate for your energy than the energy 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? 

Yes, if you receive the Warm Home Discount, you will be covered by the Ofgem energy cap, but only if you’re on a standard variable tariff. If you’re not sure what type of tariff you’re on, just check your bills or get in contact with your energy supplier, as they should be able to confirm whether you’re eligible for the Ofgem price cap. 

How is the Ofgem energy price cap calculated? 

The energy price cap is determined by Ofgem, the energy industry’s regulator. It is based on the latest cost estimates for suppliers. There are a wide variety of factors that affect these costs, including networks, tax, environmental and social programs, and the cost of wholesale energy. In addition, Ofgem consider the costs incurred by the supplier and ensure that they have enough 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 meter 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 Ofgem will raise or lower the cap at regular intervals, so it may be a good idea to take out a fixed rate plan to keep yourself protected against fluctuating energy prices. 

Ben GallizziEnergy Expert - Oct 23rd 2019