Martin Lewis: Energy price cap to rise by 51% on 1 April – should you fix now?
I've been calling for Government intervention to prevent an energy bill crisis before 1 April, when the price cap – which most bills are now based on – is predicted to rise 51%, adding typically £600/year to bills, a nightmare that'll throw millions into fuel poverty. Unsurprisingly, with this prediction many are asking me if they should now move off the price cap to fix?
After number-crunching, for most, it's still a 'no', but for the first time in many months fixing may be worth it for a few. Below I take you through it, or you can watch my five-minute video explanation.
Martin's five-minute video explainer (courtesy of ITV)
The clip above has been taken from The Martin Lewis Money Show on Thursday 6 January 2022, with the permission of ITV Studios. All rights reserved. You can turn on subtitles by selecting the keyboard image at the bottom right of the video. You can also watch the full episode on the ITV Hub.
This is all about the price cap, which 60%+ (and rising) of homes are on
The price cap limits what firms can charge in England, Scotland and Wales for their default standard variable tariffs. Calling it a 'price cap' is a misnomer, there's no max you pay for energy, think of it more as a cap on the cost of each unit of gas and electricity. Most people who aren't on fixes are on it. You're on it if:
- You've never switched tariff.
- Your cheap fix ended and you did nothing (as there are no cheap deals now, many are being moved to it).
- Your energy firm recently went bust and you were moved elsewhere.
For years I warned price-capped tariffs were far from cheap. Yet last year wholesale energy prices (those suppliers pay) exploded, and as that takes time to feed into the cap, it currently forces firms to sell gas and electricity massively below cost. In fact, there are NO MEANINGFULLY CHEAPER SWITCHABLE DEALS. That's why my mantra's been 'do nothing', as then you're on, or will eventually move to, a price-capped tariff.
The price cap will likely rise a sickening 51% on 1 April
It's revalued six-monthly, based on wholesale energy prices, which are now astronomical (see how the price cap's set). The latest evaluation period finishes this month, so predictions are firming up. Analysts Cornwall Insight's latest is the cap will rise 51%, that's £1,925/yr for someone on typical use. Other predictions range from a 46% to 56% rise. It'll likely hit pockets immediately, as even while April usage is lower, direct debits will be upped then based on annual usage.
THE BIG QUESTION: Should you ditch the price cap to fix?
Sticking on the price cap has saved people large so far, but as we get nearer to 1 April, less time and therefore benefit remains of the current low rate. Switch now, and as moving firm takes an average 17 days, you'd lose just over two (high use) months' cheap rate. We've factored all that into the number crunch and currently (the percentage level will rise in coming weeks) the result is...
If you're offered a fix that's no more than 40% costlier than your current price-capped tariff, it's worth considering – especially if you value budgeting certainty
THE BIG PROBLEM: No open market tariffs are that cheap, though some existing customer deals are close
The market's cheapest fix right now is an average 56% more than the cap – though some with very low or high usage may find it cheaper (do a cheap fix comparison to see). At that rate, fixing's unlikely to be worth it.
A few existing customer deals (especially from Scottish Power and Octopus) may get closer, so if you're offered one, do the numbers to see what % the increase is. Though as in-house switches happen quicker, you'll lose more cheap rate time.
Of course, fix now and if wholesale prices drop rapidly, so fixes get cheaper in future, you would've unnecessarily lost out on the current cheap cap rate (you could always fix again then, just paying early exit fees – trivial in the big picture right now). Then again, don't fix now, and if prices rise, fixes could get even more expensive. This isn't easy.
Confused? Most should still DO NOTHING and stick on the price cap
I know this is complex. So to summarise, it looks like most people should do nothing (no certainty, I don't have a crystal ball), it looks like only a few edge cases should be looking at fixing right now. So if in doubt, just stick on today's cheapest price – which is the cap. And to be plain, the 40% figure is my best guess, not firm. Other assumptions I've needed to make are:
- Neither the Government or Ofgem change the methodology, market or levies on firms.
- The October 2022 price cap will be similar to April's. Yet it's based on future, unknown February-July wholesale prices. In fact, if wholesale prices don't drop from where we are now, the cap will likely rise another 20% on top in October.
- I've calculated based over the next year and not looked at longer-term fixes.
Worried you can't pay bills? There's help available
This is a dreadful situation. If paying your bill is tough, check if you can claim the Warm Home Discount or an energy grant and talk to your supplier – you won't have your supply cut off and it may be able to put you on a payment plan. And of course, aim to decrease usage – see 9 energy saving tips.