Energy price cap: Martin says a fair tariff isn't the same as a good one

Energy regulator Ofgem has announced its proposals for setting the energy price cap, which will limit the amount standard variable tariffs and default fixed tariffs can cost.

Under the current proposals, the cap would be £1,136/year for a typical household paying by monthly direct debit – the same level as the existing cap for prepayment and vulnerable customers.

However, the exact level of the cap will depend on how much energy you use, so individual savings will vary.

The proposal on how to set the initial level of the cap, which will apply to all firms and is set to come into force this winter, will now be consulted on for five weeks. 

While the price cap has been lauded by the Government as a way for millions of households to save on their bills, in practice many energy companies are likely to set their standard prices to within £1 of the limit, as we have seen with the prepayment price cap.

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Martin: 'This is a halfway house, a hodgepodge'

Martin Lewis, founder of MoneySavingExpert.com, said: "Ofgem has been brave, setting the price cap lower than expected. It will mean millions see a noticeable reduction in bills. Yet the regulator was given a poisoned chalice. It is calling this new tariff a 'fair' tariff, but that isn't the same as a good tariff.

"The savings are still pitiful compared to the amount people would get if they switched and went to the market's cheapest providers – but there is a real concern the imposition of a cap will give people a false sense of security that doing nothing is fine.

"In fact, the problem with this price cap is it is a bastardisation of the current market model – which is meant to be about competition. To make that work, and encourage switching, you need big differentials – some will have to pay more than others. The alternative is price regulation, where we simply tell companies what they can charge. We need to pick one and work with it. This is a halfway house between the two, a hodgepodge.

"Already in the run-up to the price cap we've seen prices concertina – diminishing choice and savings for those who do switch. Two years ago, four of the big six firms offered fixed tariffs less than 10% more expensive than the market's cheapest. Now even the best from the big six is nearly 20% more.

"If we are to stick with a competitive market, a blanket price cap is an indiscriminate solution. Instead we need to decide who is and who isn't an acceptable victim of it. If I – as someone who is web-savvy, affluent and financially informed – chooses not to switch, that's my problem. If a struggling 90-year-old granny who's not on the web is too scared to switch, it needs fixing."

How will the cap work?

The cap will be in place from the end of 2018 at a provisional maximum of £1,136/yr for a typical household paying by direct debit, or £1,219/yr for non-direct-debit households – though the actual level of the cap will vary depending on where you live and how much energy you use. 

This initial level, once implemented – which is expected to happen in December – will last until April 2019, and will then be reviewed every six months after that, to bring it in line with the prepayment cap review periods.

It will continue until 2020 when Ofgem will recommend on an annual basis if it should continue, up to 2023.

It will be absolute, meaning it won't vary between suppliers.

What is a standard variable tariff? 

A standard variable tariff or SVT is an energy supplier's 'default' tariff. The costs are variable, so the rate you pay can go up or down depending on wholesale energy costs – what suppliers pay for gas and electricity – and there are no exit fees or a fixed end-date. If you're on a fixed tariff and your deal ends, you'll most likely be rolled automatically on to your supplier's SVT if you do nothing.

SVTs are typically more expensive than other plans a supplier can offer, and this year we've seen a raft of price hikes – with Scottish Power last month becoming the latest big six firm to announce it's hiking its SVT for the second time.  

How much could I save?

Currently, 11 million households are on a big six standard tariff, which on average costs £1,221/yr on typical use when paid by direct debit – about £85 more than the proposed level of the cap. Ofgem's £75 saving figure is an average across all payment methods.

However, the savings are paltry when you consider the cheapest energy deal currently costs just £859/yr on typical use – over £270 lower than the cap. There are more than 100 tariffs available to consumers right now that are under the new price cap level.

All big six SVT prices are higher than the proposed price cap. Scottish Power customers are set to see the biggest savings, at £121, while a typical user on SSE's SVT will see prices drop by an average of just £60/yr. 

If you're on one of these standard tariffs, you could save £100s by switching – see our Cheap Energy Club to find the best deal for you.

My prices are already capped – does this affect me? 

Prices are already capped for those on prepayment meters and vulnerable customers.

In April 2017, Ofgem introduced a price cap for everyone on prepay tariffs. This remains separate to the cap on SVTs, so you won't be affected by this. However, the regulator has recently announced it is increasing the level of the prepay cap, so your bills could soon be going up.  

In February 2018, this prepay cap was extended to protect an additional one million vulnerable consumers who are on poor-value SVTs and receive the Government's Warm Home Discount.

These vulnerable customers will be brought under the new price cap for standard tariff customers. 

Why is the Government capping prices?

The price cap was initially announced in October 2017 by Prime Minister Theresa May in her speech to the Conservative party conference – though the prospect of an energy price cap was raised before the last general election. 

In July 2018, the Government passed legislation requiring Ofgem to introduce a cap on SVTs – with the aim of tackling "the amount consumers have been overpaying the big six energy firms", estimated at an average £1.4 billion a year by the Competition and Markets Authority.

At the time, May said: "For far too long, older people, hard-working families and those on low incomes have been subject to rip-off energy tariffs. Our energy price cap will protect households from unfair price rises in time for this winter when people can feel the pinch more acutely."

'Price protection for 11 million more households'

Dermot Nolan, chief executive of Ofgem, said: "Ofgem is working to put in place price protection for 11 million more households on poor-value deals so that everyone pays a fairer price for their energy."