The Government has published draft legislation to bring in an absolute price cap on standard variable energy tariffs - but only as a temporary measure until 2023 at the latest.

The new parliamentary bill requires energy regulator Ofgem to bring in the cap "as soon as practicable" after the legislation's passed. We don't yet know what price the cap will be set at though, or how it will be calculated by Ofgem.

Some 12 million households in England, Scotland and Wales are on standard variable tariffs and most are likely to be subject to the cap - though it won't apply to 'green' tariffs. It also doesn't apply to prepay customers, who are already covered by an existing price cap.

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How the new price cap will work

Here's what we now know about the price cap on standard variable tariffs:

  • It will be an absolute cap, so will simply set a rate above which no energy supplier can charge (though this is likely to vary by region and your final bill will still be based on how much energy you use). We don't yet know what the cap will be set at, or exactly how it will be calculated - it'll be decided by Ofgem after the bill becomes law.
  • It will cover most people on a standard variable tariff. It applies to England, Scotland and Wales - but not those on prepay tariffs (who are already covered by a separate cap), or 'green' tariffs (special tariffs which meet certain environmental standards). If you're on a fix, the price cap won't affect you.
  • It won't come in before next year at the earliest. There's no set date. The bill will first need to go through 'pre-legislative scrutiny' by a committee of MPs, which usually takes three to four months, and will then have to go through Parliament. Only after it's passed will Ofgem be able to take action.
  • It will be temporary. The cap will initially last until the end of 2020, after which Ofgem will review the market and make a recommendation on whether to extend it, with the final decision resting with the energy secretary. The cap may then be extended by a year up to three times, so up to the end of 2023 at the latest.

Martin: 'A price cap is a halfway house'

Martin Lewis, founder of MoneySavingExpert.com, said: "A price cap done wrong can do more harm than good. Some Tory MPs had been lobbying for a ‘relative’ price cap – which means a firm's most expensive price can only be a set percentage more than the cheapest. That’s self-defeating – it means they’ll just withdraw cheap deals – so I’m happy to see that if we are going to have a cap it is to be an absolute cap which doesn’t create that problem.

"Yet ultimately a price cap is a halfway house. Politicians have to make their minds up. Do they see competition and switching as the solution, or do they want to regulate prices? For switching to work you need big price differentials – so some will have to pay more than others. A price cap narrows the differential. 

"Those who did switch may end up dis-incentivised to do so. Those who don’t switch will save some money, but not as much as if they embraced the competitive market or all prices were regulated.

"If we are to stick with competition, what we need to do is decide who is and who isn’t an acceptable victim of competition. If I – as someone who is web-savvy, affluent and financially informed – chooses not to switch, that’s my problem. If a struggling 90-year-old granny who’s not on the web is too scared to switch, it needs fixing. A price cap however is an indiscriminate solution, which isn’t ideal.

"For this winter though, forget the price cap. Right now someone on a big 6 standard tariff with typical usage pays £1,130/yr on average, while the cheapest tariffs are £820/yr – same gas, same electricity, same safety. Everyone should check if they're on the best deal now. Too many already choose between heating and eating."

'People who show loyalty to well-known brands are paying too much'

Speaking about the bill, Business and Energy Secretary Greg Clark said: "People who show loyalty to well-known brands are paying hundreds of pounds a year too much on standard variable tariffs and I am determined that this practice should end.

"We have published draft legislation today, sending a clear message to the industry that we will protect the interests of their customers if they do act now to tackle the detriment found by the Competition and Markets Authority."

What about Ofgem's price cap for vulnerable households?

Today's price cap announcement is separate to plans announced by Ofgem yesterday for a price cap for a million 'vulnerable' households, which will come in by February.

This price cap will apply to anyone who's on a standard variable tariff, gets the Warm Home Discount and isn't on prepay. If that's you, your provider will automatically move you to a 'safeguard tariff', which will be subject to a price cap of £1,048/yr for a typical user. See the Price cap for 'vulnerable' households news story for more info.

Ofgem says that once the Government's wider price cap comes in, this 'safeguard tariff' will be withdrawn, and it will halt current plans to extend the tariff to protect a further two to three million more vulnerable customers.

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