Energy prices fall as price cap starts – but don't be fooled, most will still overpay
Millions of customers stuck on expensive standard tariffs should start to see lower energy bills this week as Ofgem's price cap kicks in, though don't be fooled – the savings are still pitiful compared to switching to the cheapest providers.
Some 11 million households on rip-off standard tariffs are set to see lower energy bills from today, as the energy regulator's price cap – set at £1,137/year on average for a typical user – comes into force.
It imposes a maximum limit that suppliers can levy for standing charges and each unit of electricity and gas for the 54% of UK households that are still on expensive default tariffs.
Though while Ofgem deems the cap 'fair', MoneySavingExpert.com founder Martin Lewis has warned that this figure is NOT a cap on the price you pay, and energy customers with higher usage could pay more than this.
See Martin's Warning: Energy price comparison savings are WRONG due to the price cap blog for more info.
Plus, any initial savings are also likely to be short-lived as the cap's predicted to rise significantly from April – so millions should be prepared to see prices climb again in just three months.
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.
The best savings still come from switching
All of the major providers have predictably priced within a pound or two of the cap.
Customers of the big six will typically save an average £84/year, though it's unlikely anyone will see these savings as Ofgem has already warned the new level from 1 April is likely to be set higher, so millions are likely to see costs rise again.
This is compared to savings of £230/year from switching to the cheapest deal on the market – there are more than 90 tariffs available to consumers right now that are under the price cap level on typical use.
To see if you can switch and save £100s/year, use our free Cheap Energy Club for a whole of market comparison and alerts when it's the right time to switch again.
How does Ofgem's energy price cap work?
Initially announced in October 2017, its aim is to reduce the amount consumers have been overpaying energy firms, previously estimated at £1.4 billion a year.
The energy price cap limits the amount a supplier can charge customers who are on its standard or default tariffs, which you'll likely be if you've not switched recently. The cap sets a maximum level 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 variable or default tariff would pay a maximum of £1,137/year on average, paying by monthly direct debit, or £1,221/year for non-direct debit households – though your maximum will vary depending on where you live and how much energy you use. See our regional price news story for more information.
Yet this is just the initial level. The cap is set to be updated at the beginning of April (and again in October), and with wholesale energy prices rising over the last year, Ofgem has warned it may need to reflect that rise when it revisits the cap in April.
It will continue to be reviewed twice a year until 2020, when 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 onto your supplier's SVT if you do nothing.
However, since 2017, Ofgem has allowed firms to move customers automatically onto default 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, though fixed rate tariffs that you've elected to switch to are not.