Martin Lewis: What the Energy Price Cap change means for you
Energy regulator Ofgem has this morning announced the new Energy Price Cap and, as expected, it's set to drop significantly. From Saturday 1 July, it'll fall to £2,074 a year for a typical household, 17% lower than the current Energy Price Guarantee (EPG) level. This means the EPG will fall away and almost everyone's bills will once again be controlled by the Price Cap.
Watch Martin's video explainer below, filmed just after Ofgem's announcement on Thursday 25 May. You can also use our 'What you'll pay from July' calculator to see how the new Price Cap will affect you.
Here's a direct transcript of what Martin said, though we've broken it up into sections for ease.
This morning, Ofgem announced its new Price Cap to come in on 1 July
"Hello. I'm Martin Lewis from MoneySavingExpert.com. This morning, the energy regulator Ofgem announced its new Price Cap to come into effect on the 1 July. And this is crucially important for virtually everyone's bills, because it dictates the maximum rates that energy firms can charge for people on their standard tariffs in England, Scotland and Wales. And almost every household is on a standard tariff – pretty much everyone who isn't on a fix.
"So for most people, this directly changes your bill. The good news is the rate is to drop by an average 17%. In other words, for every £100 you currently pay on gas and electricity, from July it will cost you £83. Now, the regulator itself uses this 'typical use' figure, saying it's dropping from £2,500 to £2,074.
"Frankly, that's mostly meaningless because no one's on the typical use, which is why I prefer to talk about it in terms of the percentage drop. But in actual practical terms, it's the maximum rate you can pay that changes. I say maximum – all of them charged the maximum, they could go cheaper, they don't, or they aren't at the moment anyway."
High daily standing charges remain unchanged after 1 July
"Now the bad news is the high daily standing charge that you pay will remain unchanged after the 1st of July. It will continue to be an average of 53p a day for electricity, 29p a day for gas. So in other words, you will pay £300 a year just for having the facility of having gas and electricity. For me, that's a moral hazard. "It means lower users cannot save much by cutting their usage. It's something I've lobbied the regulator on. No change yet, but there is a consultation there that they put out today that may see that change a little bit in future. What's actually happening to cut the price is the unit rates that you pay are being decreased – an average of 3p per kilowatt hour, meaning electricity will go to 30.1p per kilowatt hour, gas to 7.5p per kilowatt hour. "Now, the rates I'm talking to you about, these are average direct debit rates. Now, I say average because this is regionalised, and direct debit because different payment methods have different rates. So just see it as a rough example. It will not be exact for you – everywhere is slightly different." Prepayment meters will see a slightly bigger drop "I want to talk about prepayment meters for a moment before I move on.Now, those on prepayment will likely see a slightly bigger drop than 17%. This is because, for the first time on the 1st of July, prepayment meter rates are to be equalised with direct debit rates, some by changing the price caps, some by a small government subsidy.
"Now, we know direct debit is dropping by 17% and we know prepay was slightly higher. So I think that will drop to be equal. My guess is it will be a 19% drop. In other words, for every £100 you top up, now you will only need to top up £81 after the 1st of July. I say I guess, because the exact numbers for prepayment haven't been published yet and probably won't be for another couple of days."
If you're on direct debit, don't expect it to alter quickly
"Direct debit, direct debit. If you're on a direct debit, do not expect it to alter quickly. Most energy firms only change their direct debit assessment a few times a year. It might not even alter by the 1st of July, it depends on when they reassess. If you think you are paying substantially too much, you can get in touch with them and say that, and it's worth doing it. "If it's too much, you will find, we're just building and updating the numbers right now on MoneySavingExpert and the 'Is My Direct Debit Fair?' calculator, so you can see what the right amount will be, but it's especially worth talking to them if you're very heavily in credit. "This is the point of the year where you should have the minimum amount of credit.So if you're heavily in credit now, with rates coming down, you might want to talk to them – make sure you've done a meter reading first – about whether you can have some of that credit back."
Tip for people on a non-smart electricity prepayment meter
"Next quick tip is for people – it's very specific this – on non-smart electricity prepayment meters.
"Because the rate you pay is dictated by the last time you topped up. So if you top up in June, you will still pay the high rate and you will pay that until you top up again. So what I suggest you do is you try and run down your meter – your electricity meter in June – so you're not topping up any more than you need to, and then you do your full top-up on the 1st of July to make sure you're paying the new rates.
"That doesn't work for every one of the meters in that category, but it does work for many of them." Are fixes going to return to the market? "Next question people say to me: Are fixes going to start on the market? Yes, we already know a couple are out there for existing customers right now. Not very many people are being offered them. They're only for very limited numbers. "But I think we'll start to see certainly more existing customer fixes being offered. In other words, your energy firm will say 'you can fix with us', and maybe some open-market deals. But be very careful. If you look at the price now, because if they give you a comparison to current prices, let's say they say it's 10% cheaper, they'll say it's a saving.But we know that energy prices, standard tariffs are coming down 17% on the 1st of July.
"So actually, a 10% saving now would mean you pay more. What I would want to see is a fix around the July price, or maybe just a little bit more. If you could get one at that price, so that you will be fixing at the price that's coming in July or a little bit more, then looking at the current predictions from Cornwall Insight who say energy bills will drop a little bit again in October and rise a little bit again in January.
"If you're risk averse and you want to know exactly what you pay, then fixing at the July price would be a good deal – even a little bit above it. But fixing at substantially above it, even if it's cheaper than you pay now, probably wouldn't be worth it. Of course, we'll be doing a lot more work on that when those fixes start being published and assessing the rates individually.That's just to give you an idea."
The state will no longer be subsidising energy bills
"Final thought. One of the big changes in July is for the first time since last October, the state will no longer be subsidising energy bills. Last October, they brought in the Energy Price Guarantee that said if the Price Cap goes too high, you'll only pay the Energy Price Guarantee and the state will pay the difference. "And that subsidy has been in place since last October. From July, the Price Cap goes lower than the Energy Price Guarantee, so we pay the lower amount. There is no longer a state subsidy. Now for me, when we know that this winter it is likely people will still be paying more than last winter because you don't get the £66 a month energy support that was available last winter.And the drop in rates does not make up for that.
"That means that the Government is spending tens of billions of pounds less than it expected to. There is some room for it to do targeted help, and I would say the real issue is the people who are just above getting benefits – those on benefits get cost of living payments. But those just above the benefits level, even a pound above it, get no help whatsoever.
"And £2,000 a year typical bills is a hell of a payment, especially without the £66 support. So if I were in charge, I would be putting targeted support in place for that to happen. But I'm not in charge. We'll have to wait and see if the Government does anything. "I hope this clears up what's happening for you a little bit."
How is the Price Cap changing?
The Price Cap changes every three months and has been falling due to lower wholesale energy prices in recent months. However, since October 2022, no one has been paying the full amount under the Price Cap. Instead, prices have been controlled by the EPG, which keeps typical direct debit bills at £2,500 a year (remember, it's the rates that are capped, so use more and you pay more).
As we pay the lower of the two, almost all households (those not on fixes) will see bills drop from July as the new Price Cap rates replaces the EPG.
Prepayment rates will drop in July by a larger amount than direct debit, falling by 20% to £2,046 a year on typical use. This is due to the Government adding a small subsidy on the gas rate on top of the fall in the Price Cap, after committing to make sure those on prepay won't pay more than those on direct debit. If you pay on receipt of a bill, prices are set to fall by about 18%, to £2,211 a year for a typical home.
Martin: 'The Price Cap rate cut is welcome, the government subsidy is over, but most will still pay more than over the winter'
MoneySavingExpert founder Martin Lewis, who successfully lobbied for the Government not to increase energy prices in April, explains what it means for bills...
"From 1 July, energy bills will no longer be subsidised by the state, as Ofgem is thankfully dropping the Price Cap below the Government's Energy Price Guarantee for the first time since it was introduced. Bills will drop by an average 17%, meaning for every £100/month people pay today, they will typically be paying £83/month from July.
"This will be a relief for many, yet most will still be paying more for their energy than during the winter. This is because, apart from for those with high use, the drop in the rates doesn't make up for the £66 per month state support people got until April – and most are on monthly direct debit, which means they pay the same in summer as winter. Overall, this still leaves people paying double or more what they did before the energy crisis hit in October 2021.
"The fact the state is paying far less than planned to support people's bills means there is some wriggle room here for targeted support for another hard winter coming for those who are just above the benefits threshold. Though I'm not holding out much hope that it'll happen.
"The moral hazard of high standing charges continues too. The reduction is all off the unit rate. It will still cost roughly £300/year just for the facility of having gas and electricity. This perversely means the less you use, the less you save. I and many others have pushed Ofgem on this, to little avail, though it is launching a consultation on operating costs which impact this and may help a bit in the future.
Warning. Some fixed-rate customers will see price rises. They should consider ditching...
"This time last year, with prices rocketing, some people took very high fixed-rate deals. Then the Government launched the Energy Price Guarantee, and for fairness, those whose fixes were more expensive than the EPG had their tariffs subsidised so they dropped to the same level. From July, as the EPG subsidy will be set as zero, that subsidy will be removed and those fixes will go back to their original price.
"For people on those fixes, it is worth considering switching to a price-capped standard tariff – possibly even if you need to pay exit fees. Though if you're coming to the end of a fix, you don't pay exit fees in the last 49 days of the fix.
A tip for prepayment meter customers...
"Prepayment rates are due to drop in July by a larger amount than direct debit, roughly 18%, as for the first time the prepayment Price Cap will be at the same level as the one for direct debit. Most of that is due to a change in how costs are allocated, and a small amount will be government subsidy.
"With most prepayment meters – both smart meters and all gas meters – you pay the rate on the day you use energy. Yet with many non-smart, prepay electricity meters, you pay the rate on the day you top up – so customers with those should be aiming to run their credit down towards the end of June, to have as little in on 1 July when prices get cheaper. Then top up on 1 July – even just a quid – so you're then on the new lower rates.
A tip for all other customers...
"Virtually all households on standard tariffs will see prices change when the Price Cap falls on 1 July. So unless you're on a smart meter which does it for you, it's worth doing a meter reading around that date to draw a line in the sand to show how much energy you actually used on the current higher rate, and how much you used on the new cheaper rates. It stops your supplier from estimating usage and potentially assuming that you've used more at the higher rate than you actually have."
What are the new unit rates and standing charges from July?
Under the Price Cap, there's no actual cap on what you pay, instead it's a cap on the maximum standing charge and unit rates your provider can charge, so if you use more, you pay more.
You can see the average unit rate and standing charge until Friday 30 June and what they will be under the Price Cap from Saturday 1 July below. To see how the Price Cap will affect your bill, or to check the rates for your region, see our Energy Price Cap calculator.
New Energy Price Cap
rates from 1 July to 30 September 2023
Current Energy Price Guarantee
rates from 1 April to 30 June 2023
Unit rate: 7.51p per kilowatt hour (kWh)
Standing charge: 29.11p per day
Unit rate: 10.31p per kilowatt hour (kWh)
Standing charge: 29.11p per day
Unit rate: 30.11p per kWh
Standing charge: 52.97p per day
Unit rate: 33.21p per kWh
Standing charge: 52.97p per day
|Rates and standing charges are averages, which vary by region. Assumes payment by direct debit and includes VAT (at 5%). For those who pay each month after getting a bill, it's an average 7% higher.|
How the Energy Price Cap and Energy Price Guarantee work (the technicals)
There are two caps on energy, and consumers are charged the one that is lower:
- The Price Cap, set by Ofgem, based on wholesale prices.
- The Energy Price Guarantee (EPG), set by the Government.
The EPG was launched in October 2022, and set at £2,500 a year for a household with typical direct debit usage. It was due to rise in April 2023 to £3,000 a year – but a campaign led by Martin Lewis and MSE meant this rise was postponed until July, when, rightly, it was predicted it would no longer be relevant because the Price Cap is now lower than the EPG. When the EPG is lower than the Price Cap, the state pays the difference.
That means currently no one pays the Price Cap rates as until Friday 30 June it is set at £3,280 for a typical household.
From Saturday 1 July, the Price Cap will fall by 37% (17% lower than the current EPG rate) to £2,074 a year. This means most households will then pay the Price Cap rate once again, and the EPG will fall away.
However, it's worth noting that the EPG does still technically run until March 2024, so if the Price Cap was to increase to more than £3,000 a year before then, the Government would reinstate the EPG to bring prices down to that level.
Based on current predictions, this is unlikely to be needed. According to analysts Cornwall Insight, the Price Cap is forecast to drop again in October to £1,976 a year, then rise slightly in January to £2,045 a year.
What does Ofgem say?
Ofgem chief executive Jonathan Brearley said: "After a difficult winter for consumers, it is encouraging to see signs that the market is stabilising and prices are moving in the right direction. People should start seeing cheaper energy bills from the start of July, and that is a welcome step towards lower costs.
"However, we know people are still finding it hard, the cost of living crisis continues, and these bills will still be troubling many people up and down the country. Where people are struggling, we urge them to contact their supplier who will be able to offer a range of support, such as payment plans or access to hardship funds.
"In the medium term, we're unlikely to see prices return to the levels we saw before the energy crisis, and therefore we believe that it is imperative that government, Ofgem, consumer groups and the wider industry work together to support vulnerable groups. In particular, we will continue to work with government to look at all options."