New energy price cap up 10% – but it's NOT the maximum anyone will pay, warns Martin Lewis
The energy price cap will rise by 10% in April, regulator Ofgem has revealed – but it's NOT the maximum anyone will pay, warns Martin Lewis.
The increase will see the price cap on standard and default tariffs hit £1,254/year for a typical user, up from £1,137/year under the current level.
For a typical household, the cap means a potential hike of £117/yr from Monday 1 April, as most suppliers are expected to price within just a few pounds of the new level.
However, this isn't the maximum you can be charged. The price cap sets a limit on the rates you pay for each unit of gas and electricity, so if you use more, you'll pay more.
Ofgem chief executive Dermot Nolan has admitted this was "the largest single rise in the last few years" – going back possibly as far as 2008.
The energy regulator said the increase was mainly down to higher wholesale costs, which are about 17% higher than when it first set the cap in November last year.
Today Ofgem also announced a £106/yr increase to the cap on prepay tariffs from 1 April – rising from £1,136/yr to £1,242/yr for a typical household.
Martin: 'The price cap will feel like a damp squib'
MSE founder Martin Lewis said: "The much-talked-about, much-vaunted, but ill-thought-through price cap will now feel like a damp squib to most people. It may have cut bills for three months, but from 1 April, the new rate jumps up 10%.
"To put this in context, the new average rate of the cap will be £1,254 a year. That's actually £34 MORE than firms were charging in December, before the cap launched – and as most of the big six providers snuggle their prices right against the cap, people will likely see that increase (though of course it may have increased more without it).
"The price cap is itself misnamed. The new £1,254 figure is not the maximum anyone will pay. It's a rate cap, not a price cap. Your cap depends on your usage, the £1,254 figure is a nominal one, showing 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 worry is the cap gives people a false sense of protection. Yet the message now is the same as it has always been. Do not simply sit on your hands and stick with your energy provider's capped standard tariff – that just means you're ripping yourself off."
So how does the price cap work?
The price cap limits the maximum amount suppliers can charge for each unit of gas and electricity you use, and sets a maximum daily standing charge (what you pay simply to have your home connected to the grid).
This means someone who uses a 'typical' amount of energy on a standard or default tariff currently pays a maximum of £1,137/yr on average, but that is set to rise to £1,254/yr in April. However, if you use more, your maximum is higher, use less and it's lower.
The price cap is reviewed twice a year, in April and October, and is set to remain in place until 2020, after which Ofgem will recommend on an annual basis if it should continue, up to 2023.
Why are prices rising?
According to Ofgem, rising wholesale energy costs (what suppliers pay for gas and electricity) were the main driver behind the increase. The regulator said these costs are around 17% higher than they were when it set the original cap level.
Last year, higher oil prices, along with other factors such as the higher demand for gas from the 'Beast from the East' weather event, led to a rise in wholesale gas prices.
Other costs, including network costs for transporting electricity and gas to homes and costs associated with environmental/green energy schemes and policy costs, have also risen and contributed to the increase in the level of the caps.
What can I do?
The best way to save on your energy is to switch supplier. If you're on a standard or default tariff, it's likely your price will be going up in April.
However, you're free to switch away at any time. Suppliers can't charge you exit fees if you're on this type of tariff – and savings of well over £250/yr are possible.
But as we don't yet know how suppliers will change their prices under the new level of the cap, it's likely that any savings you see when you compare will be underestimated.
So factor this in when you compare. You can use our Cheap Energy Club to compare the whole of the market.
What does Ofgem say?
Dermot Nolan said households would have been paying between £75 and £100 more right now had the cap not been introduced in January.
He added: "Under the caps, households on default tariffs are protected and will always pay a fair price for their energy, even though the levels will increase from 1 April.
"We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering.
"Alongside the price caps, we are continuing to work with government and the industry to deliver a more competitive, fairer and smarter energy market that works for all consumers."