What is the Energy Price Cap and How Does it Affect Me?
The energy price cap is set by Ofgem and aims to limit the amount that energy providers can charge consumers each year. For those on default tariffs, the cap is increasing by £139 to £1,277 in October 2021, and energy bills are likely to rise as a result.
With energy bills already making up a significant proportion of a household’s expenses, hearing that energy prices are increasing can cause a lot of stress and worry.
The energy price cap, which regulates the cost of energy, is rising on 1 October 2021 and, as a result, many suppliers are increasing the amount they charge customers per unit of gas and electricity. This affects everybody in some way, but it directly affects the 15 million or so households on standard variable tariffs and prepayment tariffs.
From 1 October 2021, the price cap will rise by £139 to £1,277 for those on standard variable tariffs and by £153 to £1,309 for prepayment tariffs.
Read on to find out more about what the energy price cap is, why energy prices are rising, and what this means for you.
What is the energy price cap?
The energy price cap is set by Ofgem, the independent government regulator for the energy market in Great Britain. It controls the amount that suppliers can charge customers for each unit of energy, making sure prices are fair and reasonable.
Ofgem first brought in a price cap in 2017 for prepayment tariffs, followed in 2019 by the price cap for standard variable tariffs. From 1 January 2021, these became a single Default Tariff Cap, but there are still different limits for the different tariffs.
By limiting the amount that energy suppliers can charge customers on these tariffs, it ensures that households don’t pay over the odds for each unit of gas and electricity they use. It aims to protect customers from soaring energy costs, especially more vulnerable individuals who may be more likely to be on one of the affected tariffs.
While the energy cap rising isn’t good news for consumers, when wholesale energy prices drop, the price cap falls and suppliers will lower their prices accordingly. Ofgem claims the cap helps households on default tariffs save £75 to £100 a year on their bills.
From 1 October 2021, the price cap will be £1,277 per year for those on a standard default tariff, an increase of £139. For those on prepayment tariffs, the cap will increase by £153 to £1,309 per year.
These figures are calculated based on the energy use of a ‘typical customer’, which assumes they use 2,900kWh of electricity and 12,000 kWh of gas in a year and pay by direct debit.
Therefore, the price cap isn’t the maximum amount you pay for your energy. If you use more than a typical user, suppliers can charge you more than the headline price cap figure. However, the amount suppliers charge you per unit of energy can’t exceed the limit set by Ofgem.
Bear in mind that energy costs can vary between regions, so the price cap may also change depending on where you live.
The current cap will be in place until at least March 2022, when Ofgem will review the level again.
Why does the energy price cap change?
Ofgem reviews the energy price cap twice a year, announcing any changes in February and August. These changes will then apply from April and October.
Ofgem works out the price cap by looking at, among other factors, the global wholesale cost of energy. In other words, the amount suppliers need to pay for gas and electricity. Wholesale prices can fluctuate and since the last review of the price cap they have increased by over 50%, according to Ofgem.
As suppliers have to pay more for energy, the price cap has risen to allow suppliers to charge customers more to cover these rising costs.
From October 2019 until March 2021 the price cap dropped as energy wholesale prices fell. However, in response to increasing costs in the wholesale market, Ofgem increased the energy price cap in April 2021, and announced they would raise it further in October 2021.
In October 2020, the price cap was £1,042 for default tariffs and £1,070 for prepayment tariffs. This means that, over the course of a year, the price cap has risen £235 and £239 respectively.
Does the energy price cap affect me?
The energy price cap directly affects anyone on their supplier’s default standard variable tariff and anyone on a prepayment tariff.
It sets the maximum amount that suppliers can charge customers on these tariffs, so an increase in the cap means energy companies can, and almost certainly will, raise their prices.
With 11 million households on a standard variable tariff and four million on prepayment meters, around 15 million households are likely to be affected by this rise.
If you’re on a fixed-rate energy tariff, you don’t need to worry about being charged more for your energy, at least until the end of your contract. When your fixed deal ends, you can sign up for a new fixed tariff. If not, you’ll automatically be put on the supplier’s standard rate which is affected by changes in the cost of energy.
However, fixed deals aren’t immune from the increasing energy costs. Suppliers are likely to raise prices on these too, so you could find yourself paying more for your gas and electricity even if you choose to lock in on a new fixed energy tariff.
What can I do to save money on my energy bills?
The price cap rising means that the cost of energy is rising, which unfortunately means there’s not a lot you can do to stop your bills from increasing. However, there are things you can do to limit the impact of these rises.
If you’re on a prepayment meter
If you’re on a prepayment meter, it’s worth seeing if you can move to a standard credit meter. This would mean you could pay for your energy by direct debit, which is cheaper than paying for your energy as you use it. Prepayment tariffs are usually the most expensive tariffs, so switching could save you money.
Even if you can’t move off a prepayment meter, you can compare different prepayment tariffs to see if you could save money with another supplier.
If you’re on a variable tariff
You are likely to be on your supplier’s standard variable tariff if you haven’t chosen a specific tariff or if your fixed deal expired and you didn’t sign up to a new one.
If you’re on your supplier’s default standard variable rate, suppliers can change the amount they charge for your energy. With the price cap increasing, customers on this tariff are likely to be charged more for gas and electricity in line with this rise.
Because variable tariffs rarely offer the best prices, switching to a fixed deal is likely to save you money. However, make sure you compare tariffs and suppliers, as some fixed-rate tariffs may actually charge more than some variable tariffs as they are not limited by the energy price cap.
Even though it may seem like you are paying a lot for your energy with a fixed deal, it is still likely to be cheaper compared to a variable tariff. In July 2021, the average standard variable tariff charged a typical customer (on a dual fuel tariff) £1,138 per year, while the cheapest tariff charged £1,015.
By locking into a fixed deal, whether it’s for 12 months or longer, you know you won’t be charged more for your energy for the agreed period. This can protect you from any further increases in energy prices.
If you stay on a variable tariff, there is always the risk that energy prices will rise further, causing your bills to increase too.
If you’re on a fixed tariff
Anyone currently locked on a fixed tariff is likely to be better off staying on their current deal until it finishes. When it does come to an end, you can choose a new fixed tariff with your current provider or switch supplier.
If you do nothing, you will automatically move to your supplier’s default tariff which could be more expensive and will be affected by changes in the cost of energy.
The prices of fixed tariffs are expected to increase in response to the rising energy costs. However, locking in to a fixed deal is likely to still be a better option than going on a default variable tariff as your prices won’t change if energy prices increase again.
The cost of energy is out of your control, but the amount of energy you use is completely up to you. By using less energy, you could cut your energy bills and save money, as well as helping the environment.
From using appliances more mindfully to draught-proofing your windows and doors, there are countless small changes you can make to save energy in your home.
» MORE: Tips for saving energy
Apply for support
If you’re struggling to pay your bills, there are a few government grants that may be able to help. For example, schemes such as Winter Fuel Payment and the Warm Home Discount Scheme can offer some much-needed support if you’re finding it difficult to afford heating for your home.
Some energy suppliers also aim to offer support to customers, through grants and other schemes, so check with your energy supplier to see if you are eligible for help. For example, the British Gas Energy Trust offers help to those in financial hardship regardless of who supplies your energy.
If you’re finding it hard to pay your energy bills, it’s important to contact your supplier as soon as possible so you don’t fall into arrears and risk them cutting off your gas and electricity supply.
Image source: Getty Images
Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more