Martin Lewis: The Price Cap rate cut is welcome, the Government subsidy is over, but most will still pay more for energy than over the winter

The energy regulator Ofgem has announced that for those on standard variable tariffs in England, Scotland and Wales, the new effective Price Cap (1) will be on a national average…

Direct debits: 17% lower taking a typical bill from £2,500/year to £2,074/year

There is no actual total cap on bills, instead there are regional caps on the maximum standing charge and the unit rate (2).

Martin Lewis, founder of MoneySavingExpert (who successfully lobbied for the Government not to increase energy prices in April), explains: "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/mth people pay today, they will typically be paying £83/mth 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."

More key updates from Martin Lewis

Warning. Some fixed rate customers will see price rise, 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….

Martin notes: "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."

How the Energy Price Guarantee (EPG) will work now

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 is currently set at £2,500/year for a household with typical direct debit usage. It was due to rise in April 2023 to £3,000/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.

Table: Energy Price Cap changes vs the Energy Price Guarantee (please credit to MoneySavingExpert)