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Martin Lewis: Energy Price Cap to FALL 12% on 1 April AND prepay becomes the cheapest way to pay – the five big things you need to know

The price households pay for gas and electricity will fall by 12% on average from 1 April as energy regulator Ofgem has announced the latest Energy Price Cap rates. Yet despite this, energy bills remain much higher than before the energy crisis hit. We've full info below.

Martin Lewis: What the Energy Price Cap change means for you

Watch Martin's video explainer below, filmed just after Ofgem's announcement on Friday 23 February. You can also use our 'What you'll pay from April' calculator to see how the new Price Cap will affect you.

Energy Price Cap drops 12% from 1 Apr and standing charges rise - Martin Lewis explains what it means
Embedded YouTube Video

Martin Lewis explains the five big things you need to know 

MoneySavingExpert.com founder Martin Lewis said: The Energy Price Cap dictates the price the huge majority of homes in England, Scotland and Wales pay for energy (so that's you unless you're on a fixed or special tariff) as most firms just charge the max.

It moves every three months, mostly based on average wholesale rates, yet there's a time lag – for example, this April to June Cap is based on November to February rates.

The new rates for 1 April have just been announced. In a nutshell, for every £100 a Direct Debit user spends on energy today, they'll pay £87.70 for it from 1 April.

So it's an improvement, and predictions are it'll drop again in July, though overall prices are still too expensive, nearly double the price of the cheapest pre-crisis fixes. The news is only just out, so here are my quickly done need-to-knows...

1. Prepay will become the cheapest way to pay.

Prepay standing charges have been lowered to equalise them with Direct Debit, yet as prepay unit rates are cheaper, that means overall for a typical user from April, prepay will be about 3% cheaper.

Prepay, which many of the most vulnerable use, was always the rip-off, so this is a staggering turnaround. And this is unlikely to be a flash in the pan – this pricing structure is likely to continue for the foreseeable future. (To be fair, even on the current Price Cap, prepay is fractionally cheaper, but that is due to a small Government subsidy. On 1 April, the gap will grow, and all due to real pricing.)

So if you're on the Cap, moving to prepayment will see a saving. Yet before you jump to it, a word of caution... if and when proper competition returns (see point 3), there are rarely any prepay deals. All the big money and discounts are thrown out to win new Direct Debit customers. So I strongly suspect Direct Debit will stay by far the overall cheapest for people who switch, but for those who don't, it'll be prepay.

2. The energy bill poll tax will get worse. Standing charges for Direct Debit will rise to £334 a year (from £303 a year now).

Even though overall bills will fall, standing charges won't. Here are the new average Direct Debit Price Cap rates, though they vary by region (current rates listed alongside in brackets).

DIRECT DEBIT:
Elec standing charge 60.10p/day (53.35p). Elec unit rate 24.50p/kWh (28.62p).
Gas standing charge 31.43p/day (29.60p). Gas unit rate 6.04p/kWh (7.42p).

PREPAY:
Elec standing charge 60.10p/day (55.53p). Elec unit rate 23.72p/kWh (28.17p).
Gas standing charge 31.43p/day (33.32p). Gas unit rate 5.82p/kWh (7.24p).

PAYMENT IN RECEIPT OF BILLS:
Elec standing charge 65.88p/day (60.91p). Elec unit rate 25.79p/kWh (30.12p).
Gas standing charge 35.21p/day (34.97p). Gas unit rate 6.36p/kWh (7.81p).

I call standing charges a 'poll tax' as you pay it regardless of usage – for example, many elderly who only use gas for winter heating still pay for their meters in summer.

I believe it is a moral hazard, as those on lower usage get less benefit and are disincentivised from cutting bills. I've long campaigned for change and am pleased Ofgem is currently reviewing it. Yet it told me the report isn't ready yet; I hope for news within the next six weeks. And while it'd be tight, I'd love to see this review, and standing charges lowered, hopefully by 1 July Price Cap – and I'll be pressing for that.

Why have standing charges gone up? Much is electricity distribution costs (a standard inflationary rise), some may be bad debt provisions (which have gone up due to so many who can't pay – but I don't yet know if that's been put in the standing charges). Also, this time some of the rise is due to the prepay/Direct Debit equalisation. To cut prepay standing charges by £52 a year, Direct Debit had to rise £10 a year.

3. Switching deals may be kicked into action for 1 April as Ofgem's changing one of the two background rules that stop it (it should've changed both).

From 1 April, Ofgem is ending the 'Market Stabilisation Charge (MSC)' regime it set up during the energy crisis, which means if you switch firm to cut the cost, the new company must compensate your old company if it's offering a cheap deal because wholesale rates are cheaper.

This has effectively blocked most firms from offering properly cheap switching deals, which is why the big savings that used to be possible from switching haven't been around. It's also why relatively paltry-saving 'existing customer only' deals have been dominating.

I was furious about this, and am sad to say lost my temper and used inappropriate language with Ofgem staff during the height of high prices in the energy crisis, when I was told it was being done to "stop the harmful effects of competition" (I made a public apology, my sentiment was right, my way of dealing wasn't). So I am of course delighted to hear it is going, and hope it will at last spur real competition to drive down prices.

Yet sadly Ofgem has extended its other market restricting rule which bans 'acquisition only' tariffs for another year (though it may review that sooner). In other words, firms must offer existing customers the same deal as new customers (existing customers can still get different deals).

In normal times I could support this. Yet at the moment, when most firms are simply sitting on their existing customers, letting them languish on the Price Cap – with some of them raking in big profits for doing so – I think we should be stimulating competition as much as possible.

Ofgem has told me there is evidence that removing the ban would benefit consumers, but it was worried to do it at the same time as removing the Market Stabilisation Charge in case it was moving too quickly. I disagree; I think we should throw the kitchen sink at getting people cheaper deals, yet my hope is it has done enough to at least start the change.

4. The British Gas Price Promise deal doesn't look as good as it did.

It's currently 12% cheaper than the current Price Cap, but promises to be £1 less than the April Price Cap, and now that won't be as big a change (Cornwall Insight had been predicting a 15% cut). In which case, if you want to fix to get price certainty, then there are cheaper deals.

For a full list and analysis of what's available, see our Should I fix my energy or stay on the Price Cap? guide.

Note: Since Martin wrote this, the British Gas Price Promise tariff has been withdrawn.

5. You can undercut the Price Cap by 3%. 

The E.on Next Pledge tariff, which you can switch to, charges roughly 3% less than the Price Cap for the first year. To get it, you need to be on Direct Debit and have or get a smart meter. So if that works for you, and you're planning to stick on the Price Cap, it's a no brainer. We've more details in our Should you fix? guide.

Those are my opening thoughts. Hope they're useful.

How the Price Cap works and what's changing from 1 April

The Energy Price Cap sets a limit on 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 to have your home connected to the grid). You can see what the unit rates and standing are where you live in our Energy Price Cap rates guide.

The Price Cap changes every three months, and from 1 April prices will fall due to lower wholesale energy prices in recent months. Here's what the Cap will be set at from 1 April:

  • An average £1,690 a year for a typical dual-fuel household paying by Direct Debit, affecting all those on standard variable tariffs (essentially everyone not currently on a fix). This is a fall of 12%.
  • If you prepay for your energy, prices will fall by 14% to £1,643 a year
  • Meanwhile, those that pay on receipt of bill will see a 13% drop to £1,796 a year.

But remember, it's the rates that are capped, so use more and you pay more.

To see what this means for your bill, use our 'What you'll pay from April' calculator. Or, if you're struggling, see our full Energy bill help guide for info on the all the support currently available.

Despite the Price Cap falling, standing charges will increase from 1 April

The fall in the Price Cap from 1 April is driven by lower unit rates. Standing charges – what we all pay just for the facility of having gas and electricity – will actually be increasing to £334 a year for Direct Debit customers. That's what you'll pay before you even use any gas or electricity.

Ofgem told us that of the £31 average increase, £10 is down to the equalisation of standing charges for those on prepay (they'll now pay exactly the same, £334 a year on average, from 1 April), while £21 of the increase is due to increases in electricity distribution charges (the cost of moving electricity from where it's generated to homes and businesses).

MoneySavingExpert.com and its founder Martin Lewis have long campaigned for standing charges to be lowered, arguing that they unfairly penalise households on lower incomes and those looking to cut their usage – see Martin's 'Why are energy standing charges so high? What can be done?' blog for more info.

In November last year, Ofgem launched a review into these charges, asking bill-payers, suppliers, charities and consumer groups for their views and how an alternative system could work. We've asked Ofgem when we can expect to hear the outcome of this review, and we'll update this story when we have more details.

Predictions suggest the Price Cap will fall again from 1 July

The current predictions are that after the 1 April drop, the Energy Price Cap will fall again by 13% in July 2024 to £1,463 a year for a typical household, followed by an increase of 4% in October to £1,521 a year.

We don't yet have predictions for 2025 – though the further out you go, the more crystal-ball gazing it is. If the predictions are right, it'll still leave households paying significantly more than before the energy crisis began in October 2021.

Some may want to consider fixing to save

Based on current Price Cap predictions, we think fixing is worth considering if a fixed deal is priced 18% less than the current January Price Cap, especially if you value certainty over what you'll pay.

  • Right now, it's possible to undercut the Price Cap with E.on Next's Pledge tariff. It promises to remain roughly 3% below the Price Cap for a year (so £50 a year at typical use), so when the Cap drops 12% on Monday 1 April, so too will this tariff. Therefore if you're going to remain on the Price Cap, it's worth considering this option.

  • The new EDF Essentials 1yr Apr 25 fix is open to new and existing Direct Debit customers, but you must have or be willing to get smart meters. It's currently the market's cheapest standalone fix, averaging 18% less than the current Price Cap, but has £50/fuel early-exit fees if (these are waived if you switch to another EDF fix).

  • Existing Octopus customers could consider its Octopus Tracker tariff (if you're not already with Octopus, you can try switching to its standard variable tariff, then switch to this). Its rates change daily based on wholesale costs, meaning it's been substantially cheaper than the Price Cap in recent months.

    Alternatively, Octopus' electricity-only Agile tariff has rates that change half-hourly, based on wholesale prices – good for those who can shift their electricity use out of peak hours.

For a rundown of all your switching options, and for a full list of the fixed deals available, see our Should you fix your energy? guide.

Ofgem will continue its ban on new-customer-only deals, but a suppliers' 'switching fee' will end on 31 March

In April 2022, energy regulator Ofgem introduced two new measures to help stabilise the market.

The first measure, known as the 'Market Stabilisation Charge', is triggered when a customer switches from one supplier to another, and if wholesale prices are a certain amount below the level used to calculate the Price Cap. It requires the new energy supplier to pay a charge to the previous supplier for every customer that switches to it. The charge has been triggered almost every week since the start of 2023.

According to Ofgem, this allows suppliers that have purchased energy in advance to recover costs if wholesale prices drop suddenly and huge numbers of customers switch away from their standard variable tariff.

The second measure put in place was a ban preventing energy suppliers from offering tariffs exclusively to new customers, to ensure any discounted deals were also available to existing customers (suppliers have been allowed to continue offering existing-customer-only tariffs).

Both the ban and the Market Stabilisation Charge were originally due to end on 31 March 2023, but were extended by one year, to 31 March 2024.

Ofgem has today announced that the Market Stabilisation Charge will end on 31 March 2024, but the ban on new-customer-only deals will continue for another year, until 31 March 2025. However, Ofgem has told us it will potentially look at ending this measure earlier.

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