Martin Lewis: Price Cap to rise 3.6%, even with the Government's six-month cut to electricity VAT

Responding to today's Ofgem announcement that the Price Cap will rise by 3.6%, Martin Lewis, founder of MoneySavingExpert.com, said: "BAD NEWS: The Ofgem Price Cap for Eng, Scot & Wales for the three months starting 1 October is to RISE 3.6%, even when you include the Government's six-month cut to electricity VAT that starts the same day.

"When the July Cap rose by 12.6% the mitigating fact was it was only for the low-use summer quarter. Now it's going to rise 3.6% ON TOP of that meaning rates will be nearly 17% higher than in April over the high-use winter period - in fact, prices are the highest they've been since winter 2023.

"Here are the new 1 October Price Cap Direct Debit average UK rates (they do vary by region though) including VAT where charged...

• Elec unit rate 26.32p/kWh (was 26.11p) UP 0.8%
• Elec Standing Charge 54.83p/day (was 57.19p) DOWN 4.1%
• Gas unit rate 7.97p/kWh (was 7.33p) UP 8.7%
• Gas Standing Charge 29.68p/day (was 29.04p) UP 2.2%

"It would've been even worse without the electricity VAT cut, as otherwise those on 'typical use' would have seen a rise of roughly 6.2%.

"It also means those who use electricity-only rather than gas will see a much lower rise, and some on very low electricity-only usage may see a slight fall as the electricity Standing Charge has been cut (mostly due to the scrapping of VAT).

"Ofgem says someone on what it calculates to be 'typical use' would see their equivalent annual cost rise by £60. Yet that’s a bit misleading the Cap only lasts three months and changes again on 1 January and sadly it's currently predicted to rise substantially again then, though that's a bit of crystal-ball gazing.

"IMPORTANT: The Price Cap only applies to Standard Tariffs... It dictates the maximum unit rates and standing charges firms can levy on their Standard Variable Tariffs (which 60%ish of homes are).

"Standard tariffs are the default you’re on if you've never switched or your fix deal ended and you did nothing. If you're fixed, or on most special tariffs, you are not on the Price Cap so its change doesn't usually impact what you pay.

"Q. Why is this happening? The vast majority of the rise is due to the spike in wholesale rates caused by the Middle East conflict. The October Cap is set on an average of wholesale prices from 19 May to 18 August, and they were high throughout the entire period. Worse, they've kept climbing since - which is why the prediction for January is for it to get even worse.

"Q. Wasn't scrapping VAT meant to stop this? It was designed to shift some costs off bills and into general taxation, and it does - but it's a drop in the ocean next to wholesale rates.

"Plus, it's only VAT on electricity that's gone, which cuts electricity costs by 4.8%, all else being equal, yet all else isn’t equal, hence the overall rise. The VAT scrapping is worth about 2.5% off the Cap, without it, prices would've risen more.

"Q. What happens to those on fixes? The electricity VAT cut for six months from 1 October applies to all tariffs, so those on fixes will see what they pay for electricity drop too. Otherwise, fixes are unaffected by the Price Cap move (until the fix ends, when you're moved by default onto on to a price-capped standard tariff unless you choose to fix again).

"Q. Is it time to fix if I'm on the Price Cap? The cheapest fixes are currently 7% less than the current Cap, so roughly 10% less than October's. With the Cap predicted to rise again in January, they look a decent bet. Your cheapest depends on usage and location, so use the whole-of-market by default comparison site www.CheapEnergyClub.com, which also has a ‘'Pick Me A Tariff Tool, if you’re not good at deciding.

"Though it's worth noting fixes were quite a bit cheaper about six weeks ago. If things in the Middle East settle down, you may be able to fix at far lower prices in future, (equally, things could get even worse).

"So, if you're someone who has been on the standard tariff for ages, then the safest thing is just to get a cheap fix now (not just any fix, ensure it's as cheap as possible, don't just stick with your own firm). Though if you're a regular fixer who'll monitor the market, there's a chance waiting is better."

"There are other options than fixing too. For lower users, British Gas has a Cap Tracker that matches the Cap rates but knocks £60 off standing charges for a year (plus £20 dual-fuel cashback via MSE). And there are EV tariffs and time-of-use tariffs worth a look."