About three million households on prepayment meters are set to see their energy bills drop after regulator Ofgem said it would tighten a price cap imposed earlier this year.

The change, which takes effect from Sunday 1 October, will cut bills by an average £19/year from £1,067 to £1,048 for a typical dual-fuel customer, according to Ofgem.

A temporary price cap on prepayment meters was introduced in April and is to be updated every six months to reflect the estimated cost of supplying energy.

The actual change to the cap or 'safeguard tariff' is linked to electricity bills, while the cap on prepayment gas prices will stay roughly the same, meaning little change to gas bills.

Customers with Economy 7 meters – who pay a cheaper electricity rate at night and a more expensive one in the day – are likely to see smaller reductions.

If you're on a prepayment meter, see our Cheap Prepaid Gas & Elec guide for how to save and to find your cheapest deal, visit our Cheap Energy Club.

Martin Lewis
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Who benefits from the cap?

The cap on prepayment meters is designed to protect customers who pay through token or coin-operated machines from paying too much for their energy.

It's meant to help those households using a prepayment meter who are more likely to be in vulnerable circumstances or fuel poverty, who have had difficulties paying in the past, or those living in properties that have had meters installed by landlords.

Ofgem says prepayment customers are less able to get cheaper energy deals because there are fewer tariffs to choose from, those available are normally more expensive, and there's less competition between suppliers for prepayment customers than for households who pay by other methods such as direct debit.

The exact amount electricity customers will save depends on what tariff they're on, where they live and whether they're paying less than the cap. Most of the three million households Ofgem estimates will save are on non-Economy 7 tariffs that are close to the current level of the cap.

Bills to drop for three million prepayment energy customers
A temporary price cap on prepayment meters was introduced in April and is to be updated every six months

Why was it introduced?

Last August Ofgem found prepayment customers paid an average £220/year more than those on the cheapest energy deals. At the end of 2015, there were 4.5 million prepayment electricity accounts and 3.5 million gas accounts, equivalent to 17% and 15% of all domestic fuel accounts.

The safeguard tariff was launched as one of the remedies from a two-year Competition and Markets Authority investigation into the energy market, as part of Ofgem's aim to deliver a more competitive and fairer market for all consumers. At its launch Ofgem said it would mean an average saving of £80/year for prepayment customers.

Ofgem also says that after the summer it will consult about the option of extending the cap for prepayment customers to more vulnerable customers.

What can you do?

If you use a prepayment meter you can still save by switching. Although the savings are not as big as in the wider market, on typical usage you could still save £70/year on average.

However, if you can, the biggest savings can be had by ditching and switching to a credit meter – usually this involves a credit check and ensuring you've repaid any debt owed to the supplier. See our Cheap Prepaid Gas & Elec guide for full details.