Table of Contents
- 1. The cap is on the unit rate, not on your bill
- 2. The price cap goes both ways
- 3. The price cap moves with the wholesale price of energy
- 4. Energy prices can vary by region
- 5. A fixed deal doesn’t always mean you’ll pay less
- 6. The price cap can’t predict the future
- 7. Going green adds cost (for now)
- 8. Pensioners who previously received winter fuel payments may not be eligible this winter
- 9. Help is out there if you’re struggling
The energy price cap was brought in to close the gap between households on expensive variable tariffs and the cheaper deals available to customers who regularly switched to fixed-rate deals. Ofgem reviews the energy price cap every three months, with the latest update due to take effect on 1 January 2025.
Following the energy crisis, many households are now stuck on a standard variable tariff deal, also known as a default tariff, where the price cap applies. Yet many are unsure how the price cap works and misconceptions can be common.
Here, you’ll find nine facts to help clear up any price cap confusion.
1. The cap is on the unit rate, not on your bill
The more energy you use, the higher your bill will be. This is because the price cap limits standing charges, plus the rate suppliers can charge you per unit (kilowatt hour) of energy you use. “If you happen to be a heavy energy user, then you’re going to pay more than somebody who uses less,” warns Rory Taylor, spokesperson for Energy UK, the trade body representing energy providers in the country.
It may be possible to reduce your bill, even when energy prices are rising, by making your property more energy efficient or cutting down your usage.
2. The price cap goes both ways
On 1 July 2024, the price cap dropped by 7%, shaving £122 off the annual energy bill for a typical household. However, a 10% increase in the price cap followed from 1 October, pushing the average dual-fuel bill up by £149 per year. A further 1.2% increase will come into effect from 1 January 2025, adding an extra £21 to what a typical household will pay over the year.
“You still sometimes [hear of] people being surprised that the price cap goes up as well as down,” said Taylor. “We have to explain it’s a price control, not a price freeze.”
3. The price cap moves with the wholesale price of energy
If the cost of supplying energy to customers goes up, the price cap also goes up – but customers remain shielded from the full force of energy market fluctuations.
The energy price cap brings the cost to consumers more in line with the cost to suppliers while limiting how much, and how regularly, companies can increase prices. “The idea is [the price cap] allows suppliers to recoup reasonable costs, and theoretically, a small amount of profit on top, but not much more than that,” explained Taylor.
For example, wholesale energy costs can account for up to 75% of a typical dual-fuel bill and wholesale prices have recently increased by around 20%. However, because the price cap is based on wholesale energy prices and other costs from a few months ago, it will only rise by 10% in October.
4. Energy prices can vary by region
The cost to providers of getting energy to different parts of the country can vary. Regional differences in distribution costs and supply and demand can mean households in different postcodes pay more or less for the energy they use. According to Uswitch, typical households in London currently pay the highest electricity bills, while average bills are lowest for those living in Yorkshire – though daily standing charges were lower in London.
5. A fixed deal doesn’t always mean you’ll pay less
When energy prices spiked in 2021-2022, the cheaper, fixed-rate deals disappeared from the market as suppliers could no longer afford to provide them. If the price cap falls, customers on a fixed tariff could end up paying more. However, in November 2024, Ofgem urged customers to “shop around” as more cheaper fixed deals are available..
Some customers prefer fixed rates: knowing exactly how much their energy bills will cost for the next 12 months means they can manage their budget accordingly. “I switched from tracker to fixed with the same supplier… and although it didn’t make a significant difference to my monthly direct debit, I wanted the certainty,” Georgina Thompson, from Milton Keynes, told NerdWallet.
6. The price cap can’t predict the future
The price cap is backwards-looking, calculated based on previous wholesale energy prices. “It’s quite a complex process coming up with that number,” said Taylor. “Quite a fair chunk of that calculation is what energy suppliers paid for energy a few months ago.”
Movements in the price cap are not an indicator of future changes in the energy market. For example, we don’t know what will happen next in the war between Russia and Ukraine, which worsened the effect of already rising gas prices in 2022. Analysts at energy research firm Cornwall Insight are currently predicting a modest fall in energy prices in 2025. However, it also cautions that prices are “substantially above historic averages” and that these higher prices may become the “new normal”.
7. Going green adds cost (for now)
Energy providers are required to pay green energy subsidies, sometimes called “green levies” to fund renewable energy initiatives. These levies make up around 11% of our electricity bills and are factored into the energy price cap. Long-term, there are reasons to be optimistic: the cost of wind and solar power is falling and the government has committed to reducing green levies during this parliament.
8. Pensioners who previously received winter fuel payments may not be eligible this winter
The latest energy price cap increase is particularly worrying for some pensioners who received £200 or £300 in winter fuel payments in 2023. Changes brought in by the new Labour government mean that winter fuel payments in England and Wales will be limited to those born before 23 September 1958 who receive pension credit or other means-tested benefits. To check the eligibility criteria, visit gov.uk/winter-fuel-payment/eligibility.
The same limits are also set to be introduced for similar winter fuel and heating payment schemes in Northern Ireland, where pensioners received between £100 and £300, and in Scotland, which had its own funding arrangements.
9. Help is out there if you’re struggling
With the latest price cap increasing by 10%, some households may find it difficult to keep on top of their energy bills this winter. If you’re worried about how you’ll afford to pay more, contact your energy provider.
“We know it can sometimes be a bit of a bit of a slog getting through to your supplier, but if they don’t know your situation, it’s very difficult for them to help,” said Taylor.
It may be possible to get help with your energy bills. Low-income households may be eligible for financial support towards the cost of heating their homes through the Warm Home Discount scheme, Cold Weather Payments, or the Household Support Fund accessed through their local council.
Image source: Getty Images
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