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 standard default tariffs, the cap is increasing by 54% in April 2022 to £1,971 per year, and energy bills will soar as a result.

Rhiannon Philps Last updated on 04 February 2022.
What is the Energy Price Cap and How Does it Affect Me?

On 3 February 2022, Ofgem announced the widely anticipated increase to the energy price cap.

The energy price cap, which regulates the cost of energy, is set to rise by 54% and will come into force from 1 April 2022.

The price cap will rise from £1,277 to £1,971 per year for those on standard variable tariffs, and from £1,309 to £2,017 per year for those on prepayment tariffs.

As a result, suppliers will be able to increase the amount they charge households per unit of gas and electricity. This affects everybody in some way, but it directly affects the 22 million or so customers on standard variable and prepayment tariffs.

Read on to find out more about what the energy price cap is and what it 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 has helped households on default tariffs to save £75 to £100 a year on their bills.

How much is the energy price cap?

Until 31 March 2022, the price cap is set at £1,277 for those on default tariffs and £1,309 for prepayment tariffs.

From 1 April 2022, the price cap will rise to £1,971 per year for those on a standard default tariff, an increase of £693. For those on prepayment tariffs, the cap will increase by £708 to £2,017 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.

For a typical customer paying by direct debit, this limit roughly equates to 7p per kwh for gas usage and 28p per kwh for electricity.

Bear in mind that energy costs can vary between regions, so the price cap may also change depending on where you live.

The new price cap will be in place from 1 April 2022 to 30 September 2022.

» MORE: How to deal with the rising cost of energy

How does the energy price cap work?

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. According to Ofgem, wholesale prices have quadrupled over the past year, which is why the price cap is increasing so much in April.

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, after the cost of energy rocketed over the course of 2021, Ofgem raised the price cap in April and October that year.

As well as wholesale energy costs, Ofgem also looks at network and operating costs, the cost of the policies and government schemes suppliers have to contribute to, and VAT, to calculate the level of the price cap.

This price cap is the maximum suppliers can charge customers on variable tariffs per unit of gas and electricity.

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.

The number of households on variable and prepayment tariffs has increased over the past few months as these have been the cheapest tariffs available. Approximately 4.5 million customers on prepayment tariffs and almost 18 million on default tariffs will therefore be affected by the new price cap.

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, and over the past few months they have typically been more expensive than staying on a variable 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.

Tariffs

The decision of whether to lock into a fixed or variable tariff is up to you. In normal circumstances, fixed rate tariffs have typically been cheaper than variable tariffs.

However, over the past few months it has been cheaper for most people to stay on a variable tariff rather than switching to a fixed-rate tariff. As the situation can change, it’s worth researching and comparing the cost of tariffs on a regular basis.

If you’re on a prepayment tariff, 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.

» MORE: Energy tariffs explained

Save energy

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.

Apply for support

In response to the energy crisis, Chancellor Rishi Sunak announced extra support measures to help households with their energy bills. As well as expanding the eligibility criteria for the Warm Home Discount Scheme so more households can benefit from the payment, the government has also brought in some new measures.

From October 2022, all domestic electricity customers will have £200 deducted from their bills. However, this will have to be repaid in £40 instalments from 2023.

Additionally, from April, households in England that are in council tax bands A to D will receive a one-off payment of £150. This will be made by local authorities and will benefit around 80% of English households.

Scotland, Wales and Northern Ireland will also receive extra funding to help households with their energy bills.

There are other existing 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.

» MORE: Help if you can’t afford your energy bills

Image source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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