What is the energy price cap?

What is the energy price cap?

How does it work and how much is it?

With the energy market in crisis, there are currently no deals cheaper than the energy price cap. As a result, the best option for most right now is to do nothing, and either stay on a capped tariff or move to it when their current deal ends. With so many of us now on or moving to a price-capped tariff, we've had a huge number of questions about it, so we've tried to answer the most common ones in this guide.

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How does the price cap work? How much is it? Plus much more

The price cap was introduced on 1 January 2019 by regulator Ofgem, with the aim of preventing the millions of households on expensive standard or default variable tariffs from being ripped off. 

These tariffs, which most people are on (usually if you've never switched, don't switch again after your fix ends, if your provider goes bust or you move home), have traditionally been £100s/year more than the very cheapest tariffs on the market. Yet the market is in crisis right now. Wholesale prices (those firms pay) are at unprecedented highs, so there is nothing meaningfully cheaper than price-capped tariffs – see Martin's latest video explainer for more on the crisis.

Ofgem is currently consulting on changes to the price cap to help suppliers cope better with huge shocks to the market, but for now here's our full Q&A on how it works.

  • The price cap sets a limit on the maximum amount suppliers can charge for each unit of gas and electricity you use, and sets a maximum daily standing charge (what you pay to have your home connected to the grid).

    That means there's no upper limit to what you actually pay – if you use more energy, you'll pay more, use less and you'll pay less.

    It only applies to providers' standard and default tariffs, so if you're on a fixed-term energy deal, the cap doesn't apply. If you've not switched in the last year or so, it's likely you're on a capped tariff.
  • The cap on standard variable and default tariffs is set by regulator Ofgem and is currently priced at £1,277/year on average for a typical household paying by direct debit (after rising 12% in October to its highest-ever level).

    For clarity, this doesn't mean that is what everyone will pay. It's the rates that are capped, so if you use more, you'll pay more.

    The rates under the price cap also vary by region, but on average, they are currently set at:

    • 4p per kilowatt hour (p/kWh) for gas
    • 21p/kWh for electricity
    • A standing charge of 26p per day for gas
    • A standing charge of 25p per day for electricity
  • Ofgem updates the maximum charges allowed under the cap twice a year – known as the summer and winter price caps. The summer price cap is announced in February (it'll be confirmed on 7 February in 2022), and the new rates take effect on 1 April. The winter price cap is announced in August, with the new rates taking effect on 1 October.

    The price cap changes are largely based on the costs suppliers face for providing energy – though there are a number of other factors that affect the cap.

  • The current price cap will remain in place until 31 March 2022, and while the next level won't be announced until February, we do have a good idea of how it will change. 

    That's because the price is based mainly on average wholesale prices for the six months leading up to the announcement of each new price cap level. We're currently near the end of the assessment period for the April 2022 cap (August to January).

    As such, due to the record wholesale prices in recent months, analyst firm Cornwall Insight is predicting that the cap will rise by 51% in April – that's £1,925/year for someone on typical use. Other predictions give the rise a range of 46% to 56% (£1,865/year to £1,995/year).

  • The price cap has been so much cheaper over these last few high-use months compared to fixed energy deals, so sticking on it has been the right move for most.

    Yet the nearer we get to 1 April 2022, the less time and therefore benefit remains of the current lower cost. There's just under three months of the current price cap left.

    Switching to a new firm typically takes about 17 days on average, so do that now and you only lose just over two months (though a high-use two months) of the cheap rate. We've factored all that in when crunching the numbers, and the result – as of 4 January 2022 – is...

    If you're offered a fix that's no more than 40% more expensive than your current price-capped tariff, it's worth considering – especially if you value price certainty

    And in coming weeks, this percentage level will rise. For full info, see Martin's latest energy crisis update.

    It's unlikely any open-market tariff will be that cheap, but some existing customers deals are close

    The market's cheapest fix right now averages 56% more than the current price cap (on very low or high usage some may be cheaper – do a fixed-deal comparison to see), but some existing customer deals get closer, so if you're offered one, do the numbers to see how much the increase is.

    Of course, fix now and if wholesale prices dropped rapidly in the next few months – so you can fix cheaper in future – you would've lost out on the current cheap cap rate unnecessarily. Yet no one knows what'll happen, and even then you could cut costs by switching again (early-exit fees of typically £60 are trivial in the big picture right now). Then again, don't fix now and if prices rise, fixes could get even more expensive. This isn't easy.

    The 'no more than 40%' calculation is an estimate – we've made a few assumptions

    This is a mix of art and science, so you need you to be aware of some of the other assumptions we've had to use:

    – Ofgem's price cap methodology doesn't change (but they are consulting on it).
    – Nor does the Government change the energy market structure of levies on firms.
    – The October 2022 price cap will be similar to April's. It's based on wholesale prices from February to July, so this is unknown.

    For full info, see Martin's latest energy crisis update 

  • The energy price cap changes every six months – mainly based on average energy wholesale prices in the months leading up to each change (see how is the price cap calculated? for more info). As a result, the average price of the cap, based on typical use, has fluctuated since it was first introduced in 2019.

    As the table below shows, the current price cap is at its highest ever level, due to rising wholesale energy costs this year. What's more, since the the latest price cap came into effect, we've seen a massive spike in the wholesale price, so we're likely to see an even bigger increase when it changes in April.

    How energy price cap has changed

    Payment method 2021/2022 winter  2021 summer  2020/2021 winter  2020 summer 2019/2020 winter 2019 summer 2018/2019 winter
    Monthly direct debit £1,277/yr  £1,138/yr  £1,042/yr  £1,126/yr £1,143/yr £1,217/yr £1,104/yr
    Prepayment (1) £1,309/yr £1,156/yr  £1,070/yr  £1,164/yr £1,182/yr £1,256/yr  £1,143/yr
    Other payment method £1,370/yr £1,223/yr   £1,121/yr   £1,209/yr £1,227/yr  £1,305/yr  £1,186/yr

    Based on Ofgem figures for typical dual-fuel use. Winter price caps last from 1 October to 31 March, summer price caps last from 1 April to 31 September. (1) The prepayment price cap has been in place since 2017, we've only shown 2019 onwards for comparison against other payment methods.

  • The price cap applies to 'default' tariffs – ones you don't actively choose to switch to – whether you pay by direct debit, cash or cheque, or prepayment. These tariffs are generally known as standard variable tariffs (SVTs), and you'll be on one if:

    • You've never switched your energy tariff. You would have always been on your supplier's standard tariff, so you will be protected by the price cap.

    • You were on a fixed deal, but haven't chosen to switch again. If you have previously chosen a fixed deal, once the fix period ends you will be automatically rolled on to to a price-capped tariff if you do nothing.

    • You were with a supplier that has gone bust. In most cases, if your supplier has gone bust (as more than 20 firms have in recent months), your existing tariff with that supplier will end, and Ofgem will pick a new supplier to take over. Your new tariff with the new supplier will be protected by the price cap.

      In the past, we have seen some providers offering rates lower than the price cap when taking on customers from failed suppliers (such as when EDF took on Green Network Energy customers) – but this is unusual, and very unlikely right now due to record wholesale prices. Regardless of what rate you're offered, you can't be charged more than the price cap when being moved from a failed supplier.

    • You're moving home. Usually when you move home, your current tariff will end when you let your supplier know you're moving out (a few do let you transfer fixed deals, so do check).

      You'll then need to contact the existing supplier of the property you're moving into, to let them know when you moved in and to set you up with a new account. From the date you moved in, you'll be placed on a 'default' tariff, which is controlled by the price cap.

    The price cap doesn't apply to any fixed deals on the market, or to any standard variable tariffs that have an exemption to the price cap (this is only for very green deals, and you still have to choose to be on them).

  • Yes. The price cap is set differently for those that pay by monthly direct debit, those that pay quarterly or on the receipt of a bill, and for those that prepay for their energy:

    • If you pay by direct debit, the price cap is an average £1,277/year on typical use. This is the lowest, as direct debit is cheaper for suppliers.

    • If you pay by cash, cheque or quarterly direct debit, the price cap is £1,370/year on typical use. Ofgem says this is higher to reflect the additional costs from suppliers to bill those that don't pay by monthly direct debit.

    • If you prepay for your energy, the price cap is £1,309/year. Similarly, Ofgem says it costs more to bill customers with prepayment meters, compared to those paying by direct debit.
  • The price cap is calculated based on a range of costs energy suppliers face. The largest cost is wholesale energy – what energy suppliers pay for gas and electricity. This accounts for about 41% of a typical bill for a tariff priced at the maximum allowed under the current price cap.

    It's also what causes most of the change to the price cap every six months, as wholesale prices are constantly fluctuating.

    Other elements include things such as the costs of maintaining the pipes and wires that carry gas and electricity, or the operating costs suppliers face for billing customers and providing metering services. See the full list below.

    Ofgem can also add on any unexpected costs to the price cap

    There's also what's known as an 'adjustment allowance', which allows Ofgem to factor any special, unexpected costs into the price – for example, during the pandemic Ofgem included a £24 per customer allowance in the cap to cover the economic fallout.

    It is also expected that Ofgem will add in the costs resulting from all of the suppliers that have failed in recent months. We won't know how much this will exactly be until the regulator announces the next rates in February, but it has been estimated at between £60-£100.

    Other costs include network, operating and policy costs

    Other than wholesale energy costs and the special adjustment allowances, the price cap is also made up of the following:  

    • Network costs. This is the costs suppliers face for building, maintaining and operating the pipes and wires that carry energy to households. It accounts for about 21% of a typical bill under the current price cap.

    • Operating costs. This covers the cost of billing and metering services, including the cost of the smart meter rollout. It accounts for about 16% of the current price cap on typical use.

    • Policy costs. This is to support Government environmental and social schemes to help households save energy, to reduce emissions and to encourage homes to get solar panels and similar renewable energy tech. It accounts for about 13% of a typical bill under the current price cap.

    • VAT. For energy, this is set at 5%, which is added to the price of all tariff rates. This is about 5% of a typical bill.

    • Earnings. This is the part of the bill that is profit for a supplier – Ofgem says it allows for a 'fair rate of return' for suppliers. It accounts for 2% of a typical bill under the price cap.

    • Payment method allowance. This is to cover the cost of taking monthly direct debits, billing people quarterly by cash, cheque or direct debit, or billing by prepayment. How much this is depends on the payment method – for those on the monthly direct debit cap, it's just 1%. For those paying by quarterly direct debit, cash or cheque, it's 7%.

    • Other costs. There are a few other small costs Ofgem accounts for, such as what's known as a 'headroom allowance', which is supposed to help with any unexpected costs.
  • When it was first introduced, the cap was set to remain in place until at least the end of 2020, although the Government has the option to extend it on an annual basis until 2023 at the latest.

    It has since been extended until the end of 2021, and the Government has announced its intention to allow the price cap to be extended beyond 2023 if required.

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