Martin Lewis: Energy Price Guarantee briefing

Martin Lewis: 16 'Energy Price Guarantee' need-to-knows

The 1 October 80% price cap rise is cancelled – prices will still rise but by far less (we've a new calc to help). FIXED? Your rate may drop too.

This guide was originally written by Martin Lewis on 13 September 2022, and is now updated by the MSE Team

I've spent months trying to raise the alarm over the energy bills catastrophe due this winter – that'd been set to take a typical bill to over five grand. My plea was for urgent intervention, so I welcome the energy price guarantee announcement, which does just that. 

It's not perfect, though I'm not sure any plan would be. It's expensive and will add billions to government debt. The guarantee's big benefit is it reduces everyone's future costs – yet that's also its problem, as it's not targeted at those who need it most. Plus it means those with the biggest bills (often the wealthiest) gain the most. Overall though, many will breathe a sigh of relief.

We, and likely energy firms too, still await some technical clarifications from the Govt, so give me a tad of wiggle room.

PS: My speciality is consumer finance, so I'll leave the economics, electricity generation plans, and the cap for businesses to others.

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1. On 1 Oct the current price cap will be replaced by a roughly 27% higher 'price guarantee rate' set to last for two years – taking a typical bill from £1,971/yr to £2,500

I've seen a lot of confusion, so let me start by saying there's NO MAXIMUM ENERGY BILL. Instead, standard tariffs in England, Scotland & Wales (roughly 85% of homes are on these) have a maximum daily fee and cost per energy unit that providers can charge. 

The quoted rates many media outlets use are just an illustration of the impact of these caps for someone with typical use (they should state that) so USE MORE, YOU PAY MORE; USE LESS, YOU PAY LESS. I prefer to instead lead on the rough percentage change.

PS: You can watch my video explaining the changes below (though it was my instant reaction and the info on fixes has changed since).To turn on subtitles, click the closed captions icon in the bottom right of the video.

Martin Lewis's instant reaction video on the energy price guarantee
Embedded YouTube Video

2. The £400 flat reduction for all homes this winter remains – take that into account and the average rise over your current cost is 6.5%

Back in May, the then Chancellor announced a £400 flat payment to reduce every household energy bill this winter. That will still happen. Factor this £400 in, and the price guarantee rise over the current cap is an average 6.5% (£2,100/yr on typical use).

Though as the £400 is the same for all, those with low usage could actually see a reduction in the total paid compared to the current rate.

In practice you will either receive, or get your bill reduced by, £66 or £67 each month from Oct 2022 to Mar 2023. See how YOU'LL receive the £400 from your supplier, as it varies by payment type and firm.

However, while the price guarantee rate is promised to last two years, there is no news on whether the £400 payment will be made next winter. If not, then in practice costs for winter 2023/24 will rise.

3. The price cap is still a cap on standing charges and unit rates

While using the calc is easiest for most, some like to see actual rates. Here are the average dual-fuel direct debit rates for the new energy price guarantee starting on 1 Oct, how it compares to now, and what was due to happen under the old price cap. The new rates include the announced ending of green levies on energy bills.

  • Electricity:
    Unit rate: 34.0p/kWh (currently 28.3p, was due to be 51.89p)
    Standing charge: 46.4p/day (currently 45.3p, was due to be 46.4p)

  • Gas: 
    Unit rate: 10.3p/kWh (currently 7.4p, was due to be 14.76p)
    Standing charge: 28.5p/day (currently 27.2p, was due to be 28.5p)

The cap varies by region and how you pay, so for full info see...

Direct debit price cap
Prepayment meter & payment in receipt of bills price cap. Prepay is usually 2%-ish more than direct debit, payment in receipt of bills 6%-ish.

The fact payment in receipt of bills is higher is why those thinking of "ditching direct debit to just pay what I owe" should be careful. It may benefit you in immediate cash-flow terms, but weight that against the fact in the long-run the rates are higher so you will pay more in total.

On Eco 7, Eco 10 or other non standard tariff? I'm being told that firms should reduce tariffs so the reduction works on the weighted average of the combined rates (around 4p/kWh for gas and 17p/kWh for electric), but its up to firms how they implement this, so we can't say for certain what the rates you'll pay are.

Bulb customer? I've also had many questions from Bulb customers on what all this means for you. Actually it's no different to everyone else, you're on the price cap and you'll go to the new price guarantee rate, so use the calc.

4. The new price guarantee is FAR COSTLIER than last winter, but also FAR CHEAPER than it would've been this winter

Many want to know if this is a good deal, so I've knocked up a table to put it in context, so you can decide for yourself.

Where it says 'prior cap', that's the old price cap regime that the guarantee replaces. Then, prices were based on the huge hikes in wholesale rates (the rises are lower than a couple of weeks ago as European policy announcements have given the market confidence).

Price guarantee increases

TABLE_CELL_STYLE % increase since last winter Typical dual-fuel direct debit bill
Price cap last winter £1,277/yr
Current price cap 54% £1,971/yr
New price guarantee for 2yrs from 1 Oct 96% £2,500/yr
Price guarantee (including £400 rebate) 64% £2,100/yr
Prior planned price cap from 1 Oct 22 178% £3,549/yr
Prior predicted cap from 1 Jan 23 259% £4,586/yr
Prior rough predicted cap from 1 Apr 23 293% £5,015/yr
Prior rough predicted cap from 1 Jul 23 240% £4,347/yr

The % increases are averages. The predicted rates are Cornwall Insight's from 8 Sept. The further out the prediction, the less sure it is.

5. On a FIXED deal? What many pay will be reduced – no one's will increase. See my new video briefing on how it works 

Technically the new price guarantee for standard tariffs is done as a reduction to the planned October unit rates. The Government has said from 1 Oct the same 4p/kWh gas, and 17p/kWh electricity reduction will apply to many (not all) fixed rates too. That's very roughly in the ballpark of a 30% decrease.

The reduction will only apply to fixes that will be more expensive than the price guarantee. It's now confirmed that higher fixed rates will at most only reduce to the level of the new guarantee. The impact of that means different things depending on how expensive your current deal is...

  • Very cheap fix: (eg, 2yr fix from before crisis started). If you'll pay less than the new price guarantee, there's no reduction.

  • Mid-level fix: (eg, fixed 3mths ago at a premium). If your fix is higher than the new price guarantee, it will reduce to the same level as the new price guarantee. 

  • High-rate fix: (eg, fixed very recently at high rate to forestall predicted future huge hikes). Your fixed rate will reduce substantially but a few of these may still be costlier than the price guarantee.

And a final note, as normal, when a fix ends, you should be automatically moved to the price guarantee rate, unless you choose something different. See our price guarantee for fixed prices guide for full info, or see my new video briefing on how it works. To turn on subtitles, click the closed captions icon in the bottom right of the video.

Martin reveals whether what you pay on a fixed-rate tariff will drop due to the new energy price guarantee
Embedded YouTube Video

6. If you are fixed, safest option is DO NOTHING now until things are firmed up – no need to call energy firms – they don't know yet

The enormous majority of those on fixes will either be automatically paying less than the new price guarantee, or will see their fixed costs reduced to be the same level as it (so effectively are moved to a price guarantee tariff).

As I explain above, a very few who fixed very recently may see a big reduction in cost, but still pay slightly more than the price guarantee. Yet a few have asked me questions...

How do I find out how my fix compares to the guarantee rate?

You can't yet, energy firms have only just got the final details of how it’ll work. So don't call - it'll be a pointless phone queue for the moment.

If you are confident doing the numbers yourself, and find that you're in the rare position that you’re on a fixed rate that will, even after the reduction, be the same or more than the new guaranteed rate, then it's worth calculating whether switching now, including any early exit penalties, would save you over the next couple of weeks before the 1 Oct price change. For most though, it's safest and easiest to wait, and the savings from doing this, even if right, are not likely to be substantial.

If my fix is more expensive than the price guarantee, can I leave exit penalty-free?

The Government said "this is up to firms" BUT I've good news...

In the energy summit at MSE Towers on Tue 13 September with the big firms' CEOs, all firms there - Brit Gas, Ovo (SSE), Octopus, EDF, E.on, Shell - agreed to my request that customers who end up on fixes at a higher rate than the price guarantee WILL be allowed to move on to that firm's price guarantee tariff, with no early exit penalties, until at least 15 Nov (some beyond that). 

While Scottish Power was not at the summit, it has also now confirmed to us it will allow customers to move with no early exit penalty.

Most firms will also communicate to the small number of people in this position, before the 1 Oct deadline, and offer them the chance to move, once they know (again it's too early now, and you may be charged exit fees before things are firmed up, so – while frustrating – it's probably easiest for most to wait a week or two for now).

Yet remember most fixes will likely be the same or cheaper than the price guarantee, in which case you won't need to do anything. And of course we'll compile firm-by-firm info when we get it in our price guarantee for fixed prices guide.

7. The extra payments for those on many benefits, with disabilities and for pensioners will continue

As well as the £400 to all households, in May it was announced...

- Benefits:
 Over eight million homes in the UK on means-tested benefits will get a total payment of £650 this year in two lump sums. The first half has been paid, the second half will be paid this autumn (there's no date yet). Full info in £650 payment help.

- Disabilities: 
About six million people across the UK on certain disability benefits will receive an automatic one-off payment of £150. Payments started going out from 20 Sept.

- Pensioners: 
Every UK household with someone over state pension age (aged 66 or above) between 19 and 25 Sept 2022 will also get an extra £300 on top of their normal winter fuel payment (usually between £100 and £300), payable in November or December.

There's no news on whether these three extra payments will happen again next year. I think the political reality though is it would be very difficult to keep the cap at this level and not make the payments (one to ask MPs about next year), though I think the £400 payment to all homes is more in the balance.

8. I'm fifty-fifty on whether the Govt will also announce a cut in energy VAT this month

The guarantee may not be the end of energy changes. I was specifically told energy VAT (charged at 5%) was not within the remit of last week's announcement. The new Chancellor is soon set to do a 'fiscal statement' (Budget-lite). This is now confirmed for Friday 23 September.

Interestingly, take the VAT and the £400 off, and a typical energy bill under the price guarantee would be close to the current cap – so a 'no rise' claim would be possible. That sounds like the type of rabbit a new Chancellor may want to pull out of his hat.

9. You will pay £273/yr even if you use no energy

You pay for having access to energy even if you don't use it. The daily standing charges rose hugely in April, and will rise a touch in October. If you've both gas and electricity, the average direct debit standing charge is £273/yr before you use owt.

I and others have continually pushed back with Ofgem to try and get this changed, but with little success.

It's worth noting there are variances in standing charges by region (eg, London is £225/yr, SW England £296/yr) – Ofgem says it is due to the different costs to transport power to where you live.

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10. Similar cap coming for Northern Ireland 

The Government has said the Northern Ireland energy price guarantee will offer households the same level of gas and electricity bill support as those in England, Scotland and Wales.

Suppliers will reduce bills by up to 17p/kWh for electricity and 4.2p/kWh for gas. You won't need to do anything to get this reduction – it will be done automatically.

It will apply from November and will be backdated to October (we've asked how this will be backdated and will update here when we know more). 

11. For those on LPG and heating oil, the Govt's said an extra £100 will be paid

Households that use heating oil and LPG to heat their homes will get an additional £100 to help with energy bills this winter – on top of the £400 you'll get from your electricity supplier. We've asked the Government how it will be paid and whether it will be the only additional payment made available. We'll update here and our LPG and heating oil guide when we know more.

12. Pay landlord directly for energy (including students)? Govt says you should benefit from the cap for new businesses (awaiting details)

For those who pay energy bills indirectly – either included in total rent or as a surcharge to a landlord – the cost is likely derived from a business tariff (which until now hasn't been capped).

There will now be a six-month cap on business tariffs which the Govt says will help this – though details are still scant. As is info on exactly whether you'll have rights to enforce the discount (especially if the prior expected higher prices are locked into your contract), we await details.

13. On a central heat network, or live in a park home? You should get comparable support 

The Government has also announced support for businesses in Great Britain that will see energy bills discounted for most non-domestic energy customers. 

This means that people who live in residential properties that have a non-domestic energy contract through a third-party provider (such as people living in park homes or in buildings with a heat network) should receive a discount on their energy bill. Your provider will get the discount, if it's eligible, but the Government will put in place legislation to make sure businesses pass on the benefits of the scheme "in a reasonable and proportionate way".

The scheme applies to fixed contracts agreed on or after 1 April 2022, as well as to deemed, variable and flexible tariffs and contracts. 

The discount for providers will be automatically applied between 1 October and 31 March 2023. After this date the Government said it will review the scheme.

14. There may be help if you're going to struggle to pay your bills

If you're already struggling, or will over the winter, it's always worth talking to your energy firm –  be polite and straight with it – and make sure you explain if you're vulnerable. There can also be hardship & debt grants from energy suppliers.

Our full What to do if you're struggling to pay energy bills guide includes energy and debt-help charities that may be able to suggest something.

15. Can you reduce your energy usage?

Obviously, cutting use cuts bills – and hopefully there are cuts you can make to improve efficiency that don't affect your lifestyle too much.

16. Don't look at energy bills in isolation – many can still make large savings elsewhere

Of course, those who have already cut to the bone won't be able to do any more, but many others should see this as a clarion call to check all your outgoings. Here are a few examples...

These just scratch the surface, so do check our full Money makeover guide to go through everything. And clearly, we'll continue to try to provide help to mitigate rises as much as we can.

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