The Energy Price Cap: What Is It?

In April, the energy price cap rose by 54%, and it’s expected to climb even higher in October. Even though the energy market is in upheaval, no deals are available other than the cap. So this means energy bills will increase.

We’ve tried to provide the most frequent questions in this article to answer them all.

How does the price cap work? What is the cost?

The price cap was implemented by Ofgem on January 1, 2019 to protect consumers from expensive variable contracts from being ripped off.

It restricts how much energy companies charge on each unit of gas and kilowatt-hour of electricity you consume, as well as a daily standing charge (what you pay to have your home connected to the grid). It is based largely on wholesale price (those who pay) and applies only to providers’ standard and default rates.

The majority of customers have been variable rates for years, which were much higher than the market’s cheapest offers. (You’ll be on one if you’ve never switched, don’t switch again after your contract expires or if your provider goes bankrupt or if you move.)

However, the market is presently in a state of turmoil. Wholesale energy prices are at all-time highs, so price-capped subscriptions provide nothing significantly less expensive.

The energy price cap will be raised in October, according to the latest information from Ofgem. The price limit will change every three months starting in October, according to a recent announcement. Which will lead to an increased cost for the average customer.

What does a 70% increase in energy costs signify for your bills?

The next price cap increase is largely predictable since it is governed by Ofgem’s published algorithm, which is based mostly on year-ahead wholesale energy costs. Price cap forecasts have increased in the last weeks, so the latest forecasts appear frightening to many.

When will the price cap be adjusted next?

Previously, the energy price cap was updated twice a year by Ofgem. The agency has lately announced intentions to change the limit four times a year starting in October.

This implies that the cap will alter in January, April, July, and October in accordance with the above.

The energy price caps are largely based on the costs suppliers incur in delivering energy – although several other variables influence the cap.

However, it has also granted itself the ability to change the cap in times of “extraordinary situations.”

The price cap was increased by 54% in April. What is the current rate, and how much does it cost per unit?

On April 1, the energy price cap increased by an average 54% compared to the previous year. It’s now £1,971 per year for a typical household, up by a massive £693 from its previous level of £1,277 per year.

The cap for prepayers has also risen by 54%, from £1,309/year to £2,017/year on average use – a difference of £708 per year.

The rise in energy prices is no surprise, and we’ve been predicting a large increase in gas prices for months due to record gasoline costs.

Keep in mind that the new cap level isn’t the highest anyone will pay. The price cap establishes a limit on your energy and gas prices, so if you use more, you’ll have to pay more.

What are the price caps for standing charge, as well as the gas and electric unit rates for each?

The following table shows the average unit pricing per kWh and daily standing fees under the new cap, as well as the previous cap.

Why has the electricity and gas bill nearly doubled since April 1?

As you can see from the table above, electricity’s standing charge has increased dramatically as a result of the new cap going into effect on April 1, 2022. – from 24.88p per day to 45.34p.

With wholesale gas prices climbing dramatically in the last several months, many people are asking why there is such a steep increase in utilities.

According to Ofgem, the increase is due to:

• The cost of transferring all of the insolvent energy company’s former customers to new providers.
• Increases in the cost of maintaining the energy networks
• An increase in policy costs (such as green levies and the rise in the warm home discount rebate).

How does the energy price cap work in practice?

The cap restricts how much suppliers may charge for each unit of gas and electricity you use, as well as a maximum daily standing charge (what you pay if your home is connected to the grid).

This implies that there’s no upper limit on how much you’ll spend – if you use more energy, you’ll be charged more, consume less, and pay less.

This cap applies to standard and default rates for energy suppliers. If you’re on fixed deals, the limit doesn’t apply. You’re probably on a capped rate if you haven’t changed providers in the preceding year or so.

Is it better to forgo the price cap for a fixed deal?

While the price cap jumped by a staggering 54% in April, it will only last until October 2022 before changing again. We could see a 70 per cent rise on top of the previous 1 April 2022 hike to around £3,359 per year on average usage before another 8% increase in January.

Has the price cap varied over time?

The energy cap is adjusted every six months (though this will change starting in October), with the greatest influence on energy prices coming from average energy wholesale rates over the preceding six months.

As a result, because of the way it was implemented in 2019, the average bill, based on typical usage, has varied significantly.

The cap has seen its most significant rise to its highest ever degree in April, as the chart below demonstrates.

What is the best way to find out if I’m on a price-capped plan?

The cap applies to “default” rates, whether you pay by direct debit, cash, or cheque, as well as prepayment. If you’re on one of these types of fixed-term contracts with a standard variable rate (SVTR), it’s because:

• You’ve never switched your energy tariff. If you remained on your supplier’s standard rate, you would have been protected by the price cap.

• You were on a fixed deal but haven’t chosen to switch again. If you have previously signed up for a fixed-term deal, you will be automatically transferred to a price-capped plan if you do nothing at the end of the term.

• You were with an energy supplier that has gone bust. If your supplier goes bankrupt (as have over 20 firms in recent months), your existing contract with them will come to an end, and Ofgem will select a new supplier to replace them. The cap will ensure that you are not charged more than the applicable limit on the new rate.

• We’ve seen some suppliers charge less than the cap when taking on customers from failing providers in the past (such as when EDF took on Green Network Energy clients), but this is unusual and quite unlikely right now due to record wholesale energy prices. When you’re switched from a failed supplier, you can’t be charged more than the cap, regardless of what rate you’re offered.

• You’re moving home. When you move, your previous contract will generally terminate when you notify your supplier that you are moving out (some allow you to transfer fixed offers, so do check).

• You’ll want to contact the owner of the property you’re moving into and notify them that you’ve moved in. You’ll also need to establish a new account for yourself with your existing supplier so they know when you arrived and can set you up with one. You will be assigned to a “default” tariff from the moment you moved in, which is controlled by the cap.

It does not apply to any specific offers on the market, or to any standard variable tariffs with an exemption from the cap (this is only for very green energy deals, and you still have to choose to be on them).

Is there a different price cap if I pay by different methods?

Yes. The cap is set differently for those that pay by monthly direct debit, those that pay quarterly or on the receipt of a bill, and for those that prepay for their energy:

• If you pay by direct debit, from 1 April 2022 the price cap is an average price of £1,971/year on typical use. This is the lowest, as direct debit is cheaper for suppliers.

• If you pay by cash, cheque or quarterly direct debit, the price cap is £2,101/year on typical use. Ofgem says this is higher to reflect the additional costs from suppliers to bill those that pay by other methods.

• If you prepay for your energy, the price cap is £2,017/year. It also costs more to charge customers with prepayment meters, according to Ofgem.

How is the price cap calculated?

The current cap is calculated based on a variety of energy suppliers’ costs. Wholesale energy is the most expensive element, accounting for about 55% of a tariff’s overall cost under the current price cap from April 2022. Wholesale prices are constantly changing, which is why the price cap is adjusted on a regular basis.

Others include the costs of maintaining gas and electricity pipes and wires to carry energy, as well as operating expenses incurred by suppliers in billing consumers and offering metering services. The following is a list of additional expenses:

Any unprecedented energy market conditions incurred by the price cap can be added on by Ofgem.

An ‘adjustment allowance’ is also taken into account, allowing Ofgem to adjust for any unique, unanticipated charges – for example, Ofgem has added the costs associated with all of the suppliers that have failed in recent months to the price cap from April. Supplier failures account for about £68 of the typical £1,971/year energy bills under the new price cap.

Other factors to consider are network, operational, and policy expenses.

The price cap is comprised of the following elements in addition to wholesale energy expenses:

• Network costs. The cost of building, maintaining, and operating pipes and wires that distribute power to residences (the energy network) is known as distribution costs. It represents roughly 19% typical energy bills under the current price cap.

• Operating costs. This covers the cost of billing and metering services, as well as the expense of rolling out smart meters. It accounts for roughly 10% of today’s price limit on average usage.

• Policy costs. This is to assist the government in promoting energy saving, emission reduction, and solar panel adoption among customers by assisting them to achieve their energy savings goals. It adds up to about 8% of a typical charge under the current price cap.

• VAT. This is set at 5% for energy, which is added to the cost of all tariff rates, including price capped tariff. This accounts for around 5% of typical energy bills.

• Earnings. This is the section of energy bills that suppliers profit from – according to Ofgem, it allows for a “fair rate of return” for suppliers. It comprises 2% of a typical invoice under the price cap.

• Payment method allowance. This is for the cost of taking monthly direct debits, bill people quarterly by cash, cheque, or direct debit, or charge them prepayment. It’s just 1% for those on the monthly direct debit limit who pay by quarterly direct debit, cheque, or cash. It’s 6% for those paying by quarterly direct debit using a credit card

• Other costs. There are a few more minor expenses that Ofgem takes care of, such as a ‘headroom allowance,’ which is intended to cover any unexpected expenditures.

What is the duration of the energy price cap?

The energy price cap was originally set to remain in place until at least the end of 2020, with the Government having the option to extend it on an annual basis until 2023 at the latest.

The government has since stated its desire to extend the price cap if necessary.

Many people are trying their best to save energy and therefore keep their energy costs low.

If any of this affects you or you have other debts which will become unmanageable it’s always better to seek professional advice.

Get in touch for free and impartial advice on available debt solutions by leaving an enquiry and one of our team will call you back and go through things to find the best debt solution for you.

You can also call us on freephone 0800 169 1536.

If you prefer to speak to one of our team through WhatsApp, our number is 07762 145 581 or speak to someone through our Live Chat service.