Martin Lewis: With the price cap rising 54%, should you fix or do nothing and stay on it?

ITV's The Martin Lewis Money Show Live – Thursday 3 February

The clip above has been taken from The Martin Lewis Money Show Live, which aired on Thursday 3 February, with the permission of ITV Studios. All rights reserved. You can turn on subtitles by selecting the closed captions icon at the bottom right of the video. You can also watch the full episode on the ITV Hub.

Here's a full transcript of Martin's 'big briefing' on the new energy price cap

"So it's all about the misnamed price cap. Why misnamed? Because there's no total cap on the cost that you pay, so it's a cap on the unit rates – the cap on the standing charge, and the cap on the unit rate for gas and electricity. I know some people want to know what that is, I'll put those out on social media, I've finally got them from Ofgem.

"You'll automatically be moved to the new price cap if you've never switched tariff, if you were on a cheap fix and the deal ends and you didn't get another one, which most people haven't now because there haven't been any cheap fixes out there, or if your firm went bust in the past six months and you automatically move to a new provider. Around 22 million homes, or the vast majority in the country these days, are on the price cap.

"And for years, I rallied against it because it meant you were massively overpaying. But the current one has forced firms to sell gas and electricity below cost price. It has artificially kept costs in the UK down until at least 1 April, which is what we're talking about. And there are no meaningfully cheaper deals than today's price cap. And there are no meaningfully cheaper deals I suspect than the new cap.

"So let's look at what's going to happen. Here's my graph [see the clip above and the graph below]. This is what it's all about – wholesale gas prices, which because so much of the UK's electricity is generated by gas, also affects that – it used to be around 50p a therm. And then look, six times what it was it went up to in September, nine times what it was it went up to a few months ago.

"While it looks like it's coming back down, we are still at four times the traditional price of energy. And that is a big part of what dictates the price cap. That's what it's based on."

The price cap could rise by another 20% in October

"So let's look at the price cap. What we now know is that the current price cap is due to go up 54% on 1 April. Now as there is actually no price cap, I'm going to explain this by what an average user would pay. But of course, if you use more you pay more, if you use less you pay less. Today, that's £1,277 a year, but from 1 April, it's £1,971 a year – a rise of £693 a year, or £708 a year for those of you on prepay.

"But we have to look a year ahead. So what happens on 1 October when it changes again? Well, that's based on wholesale rates from the beginning of this month until the end of July. And we don't know [yet what these prices will be]. But what we can see is if those wholesale rates stayed where they are right now, in October there would be another rise of 20% on top, putting rates for typical use over £2,300 a year. For those who had a cheap fix last year, it's nearly two and a half times more.

"So of course the question you will ask me is: 'Should I be sticking on the price cap? Should I fix?' Well, I've done the numbers, I've had to make a lot of assumptions. I don't have a crystal ball.

"If we assume that in October, the price cap stays at where it is in April, you would have to find a fix that was less than 44% more expensive than where we are right now for it to be worth fixing. If we think it's going to go up in October as that line shows by 20%, you need to find a fix that is no more than 59% more than the price cap today.

"And let's have a look at the fixes. The cheapest fix right now is 68% more than the current price cap, way more than the 1 April price cap, and even more than my high-end scenario of it going up by 20% in October.

"Now of course anything can happen. But there isn't any market fix that you should be going for right now. Maybe some existing customers in certain circumstances with high or low use might find one. But the big message for most people – DO NOTHING. Stick on the price cap. Don't fix. Do nothing is still the answer."