Martin Lewis: Energy Price Cap to fall 7% on 1 July (though it's still a Pants Cap). What it means for you and the new rates

"We've just heard that the Energy Price Cap is to drop 7% on 1 July. But my big message is it's still a Pants Cap and you should get off it if you can. I'm going to talk you through exactly what's happening, what it means for you, and crucially, what you should be doing about it. So let's start with the basics.

"What is the Energy Price Cap? Well, it's set by the regulator and it dictates the maximum rates that firms can charge on their standard tariff, their default tariff. The tariff you're on if you've never switched. The tariff you're on if your fix or special deal ended and you haven't done anything. If you are on a fixed deal or a special deal that you've arranged for yourself, this doesn't apply to you until that fix or special deal ends.

"Now, 65% of homes in England, Scotland and Wales are on standard tariffs, i.e. they are price capped. And while it's called a Cap, actually most firms just do it at the maximum. So really it's the regulator setting the price of standard tariffs. So if you're on one of those standard tariffs, this applies to you.

"If you're on a fix, it doesn't. The rate has dropped 7%. That is welcome, but nowt to shout home about. Remember it went up 10% in October, up 1% in January, up 6% in April.

"So all that's really happening now is we're going back to the price that you were paying at the beginning of the year on the Price Cap. And in fact, if you contrast what you will pay this July, August and September—because the Price Cap lasts three months—to last July, August and September, well, you're going to pay 10% more than you did last year.

"So let's do a little bit of specifics and detail about exactly what's happening. The Price Cap is not a cap on the total amount you pay. It is a cap on the daily charge you pay, the standing charge you pay just for having the facility of gas and electricity, and the unit rate—the cost per kilowatt hour that you pay for each unit of gas and electricity you use.

"The electricity standing charge is dropping 4.5%. The unit rate is dropping 4.8%. The gas standing charge is dropping 8.7%. The unit rate is dropping 9.4%. Those are the figures on average for someone paying by direct debit. It does vary by region, and it does vary by how you pay, but that gives you the scales of magnitude.

"So what you can see from that is if you have gas and electricity, because the gas rate is coming down by more than the electricity rate, your saving will probably be slightly more than the 7%. If you just have electricity, the drop is going to be around 4.5% to 4.7%.

"Now I just want to debunk something you may well be hearing on the news today, especially on the BBC, which for some bizarre reason keeps quoting that people are going to save £129 a year. That's just not correct. First of all, that's based on typical use, which is an Ofgem calculation.

"But of course, like every average, the vast majority of people are either paying more or less than it. That's how averages work. But more importantly, the Price Cap only lasts three months—it's only July, August and September. So equating an annual saving of £129 doesn't make sense. A far better way to think about it is: on average, for every £100 you pay for energy now, in July, August and September, you will be paying £93.

"Now let's get on to the most important bit. The Price Cap is a Pants Cap. Why do I say that? Well, it was originally set up to be a backstop for those people who couldn't switch or wouldn't switch, so it would set a limit on the maximum amount to pay.

"But then we had the energy crisis, competition disappeared, and virtually everybody was on the Price Cap, so it became a regulated price. Even now, nearly two thirds of homes in England, Scotland, and Wales are on the Price Cap. Northern Ireland, by the way, doesn't have the Price Cap—it's on a different system.

"So it's far too many people, especially when you contrast it to the cheapest fixes. The cheapest fixes available right now, when you lock in a rate, a standing charge, and a unit rate for a year, are 18% below the current Price Cap.

"Remember, the Price Cap is due to drop 7% in July, so as you can see, 18% is still far, far less. Now the predictions—and of course predictions can be wrong; this is a bit of crystal ball gazing, this is what the analysts are saying at the moment—is the Price Cap will come down again in October by maybe 2% or 3%.

"There is some disagreement on exactly how much, and then it will go up a smidge in January, and then it will probably go up again next April. So it's, as you can see, going to stay roughly over the next year, if the predictions are right, about where it is from July onwards.

"Of course, there's a big orange fella in the White House, and all this is about global economic costs of gas. So things could change on the back of that, because that's how the prices are set. So nothing is set in stone.

"But on the balance of probabilities, getting a fix right now will: one, save you straightaway—you won't have to wait for July; two, will be a lot cheaper than the July Price Cap; and three, if the predictions are right, will be substantially cheaper than the Price Cap afterwards. Of course, I can't promise that. Anything could change. But on the strong balance of probabilities, de-risking yourself is getting onto a cheap fix right now.

"You do that by going to a whole of market comparison site. Frankly, that means Cheap Energy Club, which is the comparison site on my site, MoneySavingExpert.com. What does 'whole of market' mean? It means it will list every tariff on the market by default, rather than hiding those that don't pay comparison sites.

"My one big warning about comparing right now, including on Cheap Energy Club, is when you're comparing, you're comparing against the current Price Cap, not the July Price Cap. We know that's going down 7%. The reason for that is, until firms publish their new rates, comparisons have to be done based on comparing against actual tariff rates.

"Therefore, the only ones available are the current rates. So if you get a saving of, say, 17%, you want to take roughly 7% off that. In reality from July, that would mean it is around 10% cheaper rather than the 17% that's being listed.

"And just a final note. Some people always say, 'hold on, I know you're saying to fix right now, but surely with the Price Cap coming down on 1 July, I should wait to fix until then?'. But that logic doesn't really work. I think many people think because the Price Cap's coming down, fixes will get cheaper.

"But actually, the Price Cap in July is based on retrospective wholesale rates—the rates that gas and electricity providers pay. It's based on the wholesale rates from the middle of February to the middle of May. That's why they're announcing it right now. So it's a look back.

"The rate that fixes are set at is based on the wholesale rates available right now and looking into the future. So the Price Cap is a time lag. Fixes are based on current and future prices.

"So you cannot use the fact that the Price Cap's coming down in July to indicate that fixed rates will come down in July, because the Price Cap is looking backwards. Fixed rates look pretty good right now. They could get cheaper if wholesale rates drop. They could get more expensive if wholesale rates go up.

"And it is impossible to predict what's going to happen because that's based on worldwide economic factors and the wholesale price of gas in the international markets. That's how our Price Cap is set.

"So should you wait or not? My argument would be: if you can save 18% right now by fixing compared to the current Price Cap, if you're on the Price Cap, you may as well bag that for safety. If you wait till July, yes, hopefully the cheapest fixes will still be substantially cheaper than the July Price Cap.

"But you've missed out [on] a month and a half of much cheaper rates in the meantime. Which probably will—well, unless there's some massive move because of some big economic worldwide shock—will probably outweigh even if fixes were to get cheaper, the benefit that you would have from that.

"So if you're risk averse, lock in the cheapest fix you can get right now. I hope that makes sense. It is quite complicated, but I've tried to do my best to explain it to you.

"Of course, final thought. I can only suggest what you should do based on the current analyst predictions of what's going to happen. They are not locked in stone. There is always a risk decision to be involved here. I think fixing right now is the best risk-averse decision. But I can't guarantee in hindsight it would be the best decision.

"And the final PS to finish: if you are getting a fix and you're nervous that things might get cheaper in the future and you'd be locked in at a high rate—while that is unlikely to happen, it's not impossible, especially with the big orange fella in the White House who means that the world economies are changing much more rapidly than we thought—then just check out the early exit penalties on any fix that you're getting.

"As long as they're less than around £50 per fuel, that gives you the flexibility to move again in the future."