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Energy prices will NOT be capped at £1,137/yr, says Martin

The energy price cap announced today is "misnamed" and is NOT an indication of the maximum amount householders will pay, Martin Lewis has warned.  

Full details of the long-awaited energy price cap were unveiled back in September, and Ofgem has since been in consultation on its final proposals.

That process has now been concluded and it means a typical user on these tariffs paying by monthly direct debit will pay no more than £1,137/year on average. 

But MoneySavingExpert founder Martin Lewis stressed the £1,137/yr figure is NOT a cap on the price you pay, rather it's a cap on the rates that will be charged.

The cap depends on usage, so that figure is indicative for someone with TYPICAL usage. Someone with higher usage would see a higher cap, use less and your cap will be lower. 

The new price cap is now set to come in at the start of next year, and Ofgem says it will see bills for 11 million households cut by an average of £76/year.

Switching energy is still the best way to cut bills – with the cheapest deals still over £200/year less than the cap. To find the best deal for you, use our Cheap Energy Club.

Martin: 'The energy price cap is misnamed'

Martin Lewis, founder of MoneySavingExpert.com, said: “The energy price cap which is being launched is misnamed, it is not a cap on the price you pay, it’s a cap on the rate that will be charged.

“This is important, even some BBC bulletins were today reporting that the price cap will be set at £1,137/yr and that is the maximum anyone will pay - that is simply untrue.

“The cap depends on your usage, the £1,137 figure is a nominal figure based on what the cap would be for someone with typical usage, if you have higher usage your cap will be higher, if you have lower usage your cap will be lower.

“The misleading coverage of the price cap has led many higher users to wrongly think that they’re about to get a very substantial reduction in their bill, that is not true. For most people who are on standard tariffs, the energy cap is likely to reduce their bills by around 10% at most.

“It should also be noted that it’s only for the short term. As expected in its press release today, Ofgem has flagged that from April, when it renews the price cap due to the large lift in wholesale price, the price cap is likely to be raised substantially.

“Altogether the message is the same now as it has always been, do not simply sit on your hands, do not simply rip yourself off by sitting with your energy provider’s standard tariff  - you are being fined for apathy.

“Make sure you’ve got the cheapest tariff on the market, many people can still cut their bills by hundreds of pounds below the price cap, by moving to a cheaper tariff.”

So, how will the price cap work? 

The price cap was initially announced in October 2017 by Prime Minister Theresa May, with the aim of tackling the amount consumers have been overpaying the big six energy firms, estimated at £1.4 billion a year by the Competition and Markets Authority.

When the cap comes into effect in January, it will limit the maximum amount suppliers can charge for each unit of gas and electricity you use – and a maximum daily standing charge (what you pay simply to have your home connected to the grid).

This means a typical user on a standard or default tariff would pay a maximum of £1,137/yr on average, paying by monthly direct debit, or £1,221/yr for non-direct debit households – though your maximum will vary depending on where you live and how much energy you use.

Yet this is just the initial level. The level of the cap is set to be updated at the beginning of April and October – and with wholesale energy prices rising over the last year, Ofgem has warned it may need to put up prices in April.

It has also acknowledged that energy switching – the best way to save on your energy – could drop by up to 50% from today's levels under the cap.

The price cap is set to remain in place until 2020, after which Ofgem will recommend on an annual basis if it should continue, up to 2023.

What are standard variable and default fixed tariffs? 

A standard variable tariff (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 onto your supplier's SVT if you do nothing.

However, last year Ofgem started to allow firms to automatically roll customers onto fixed tariffs – provided there were no exit fees and the tariff is the same price or cheaper than the SVT. These tariffs will also be covered by the cap.

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 £84 more than the proposed level of the cap. Ofgem's £76 saving figure is an average across the ten biggest suppliers.

All big six SVT prices are higher than the price cap. Scottish Power customers are set to see the biggest savings, at £120, while a typical user on SSE's SVT will see prices drop by an average of £59/yr.

However, the savings are paltry when you consider the cheapest energy deal currently costs £921/yr on typical use – over £200 lower than the cap. There are more than 80 tariffs available to consumers right now that are under the new price cap level.

While you could still likely save £100s by switching when the price cap comes in, Ofgem has warned that it could lead to reduced energy switching, as the gap in price between standard tariffs and the cheapest on the market shrinks – leading to lower financial incentives to switch energy.  

But don't be fooled, you could save £100s/year by switching – see our Cheap Energy Club to find the best deal for you.

Big six standard tariffs vs Ofgem's price cap 

Supplier Price/year  How much over the price cap
British Gas £1,205 +£68
EDF £1,227 +£90
E.on £1,208 +£71
Npower £1,230 +£93
Scottish Power £1,257 +£120
SSE  £1,196 +£59
     
Price cap £1,137 -
Based on calculations from Ofgem for medium usage.