More than half (54%) of British households are on poor-value default energy tariffs, often because they’ve loyally stuck with the same energy supplier for years. But as of 1 January 2019, the price energy suppliers can charge customers on these default and standard variable tariffs has been capped.
The energy price cap, pegged at £1,254 since 1 April 2019, will save 11 million households on their gas and electric bills. But not everyone will benefit, and even customers who are protected shouldn’t be complacent that it will fetch them the best deal.
It was instituted by an act of Parliament – the Domestic Gas and Electricity (Tariff Cap) Act – and is administered by Ofgem, the energy market regulator. The cap will be in place until 2023, although the level will be adjusted biannually, in April and October, to reflect changing wholesale energy costs.
The energy price cap is designed to alleviate the loyalty penalty, the premium paid by customers who faithfully stick with the same energy supplier for years. Research has indicated that 11 million households are stranded on these pricey default tariffs, which they were often quietly rolled onto after their fixed rate deal expired.
Switching energy supplier or tariffs is the best way to trim your energy bills. Customers hopping from default tariffs to the cheapest fixed rate deals on the market can save, on average, nearly £300 a year.
But many customers are leaving these savings on the table, often because they’re baffled by the energy market or daunted by the switching process. Just 15% of customers switch energy supplier each year. And Ofgem has found that 57% of households have never switched energy supplier or have switched just once. Elderly customers and households on low income are less likely to be actively engaged in the energy market and thus more likely to be paying over the odds for their fuel. The energy cap protects those 11 million under-engaged households.
If you’re on a standard variable or default tariff – you can find your tariff name and details on your energy bill – you should already be seeing the cap applied to your bills. Your bills likely fell in January, when the cap was first introduced, but rose in April. Your supplier will have written to you to notify you of any changes in their pricing.
If you’re on a fixed rate tariff, the energy cap doesn’t apply to you. But you’re most likely already paying a lower rate for your energy than the cap would guarantee you.
If you’re on a pre-payment tariff, this energy cap also won’t apply to you. Your bills will be limited by a specific pre-payment price cap, sometimes called the safeguard tariff, which has been in force since 2017.
If you’re in doubt whether you’re currently protected by a price cap or should be, contact your supplier.
But that doesn’t mean you won’t pay more than £1,254 in reality for your energy annually. The cap isn’t a limit on your total bills, but rather on the per-unit rate you pay for energy, plus standing charges.
The £1,254 figures used by Ofgem and in the media is the cap for average annual use, extrapolated from the capped unit rates for gas and electricity, using the Typical Domestic Consumption Values (TDCVs) set by Ofgem. If you use more than the medium TDCV level – 12,000 kWh of gas and 3,100 kWh of electricity per year – you’ll pay more than £1,254 a year.
Additionally, the exact level of the price cap varies by region, to reflect the different costs of transporting gas and electricity across the energy network in your region. It will also be higher if you don’t pay by direct debit.
The level of the price cap is reviewed by Ofgem twice a year, in February and August, to account for changing costs of wholesale energy, as well as the other costs – including network charges, taxes, and environmental and social programme fees – faced by suppliers. The cap was raised by £117 in April 2019, but Ofgem has assured customers that it could fall in the future.
When it was introduced, at a lower level, in January 2019, the price cap was expected to save 11 million households average of £76, and up to £120, a year on their energy bills – or £1 billion cumulatively.
Although the cap was adjusted upward in the spring of 2019, it’s reportedly still saving those households money on their bills. Ofgem has suggested that bills for these customers would be £75 to £100 more expensive if the cap were not in place.
Consumers shouldn’t assume that the prices guaranteed by the price cap are the lowest on the market. In fact, research suggested that even at the lower level, the energy price was more expensive than 60% of tariffs on the market and that customers can save more than £200 if they compare energy and switch from a price-capped tariff to a fixed rate one.