The Ofgem Price Cap - How Does It Affect You?
Updated: May 19
The Ofgem price cap aims to make sure that the Big Six don’t charge you more than they need to. This could be bad news if you’re currently on an expensive tariff, but it could be good news if you haven’t switched suppliers in a while, as the cap may mean that your current supplier will be forced to offer you better prices to keep your business - at least until 2022 when the price cap ends.
Let’s take a look at exactly what the price cap means and how it could affect you...
Is there an energy price cap?
The simple answer is ‘no’. There is no cap set on energy prices in Great Britain, instead Ofgem does have a target for what it calls an ‘affordable energy basket’.
The idea of an affordable energy basket is that if all customers are paying below an average price of £1,137 per year by 2020/21 (the estimated inflation rate between June 2017 and May 2022), then Ofgem believes that British households will be paying a fair price for their gas and electricity.
By calculating and comparing individual supplier data throughout England, Scotland, Wales and Northern Ireland every six months, Ofgem then creates a new cap each time to give as many suppliers as possible room to compete against one another on price.
The Big 6 Energy Providers
At present, there are six big energy providers in Britain. These companies, called the Big 6 include British Gas, EDF Energy, E.ON UK, npower (previously owned by RWE), Scottish Power and SSE. These companies control over 80% of energy supply in Great Britain.
In total there are 60 million customers across these companies and those who have one of these suppliers on their bills pay £7bn in yearly electricity charges according to statistics from 2019.
What is the Ofgem price cap in detail?
The Ofgem price cap is a limitation on how much electricity suppliers can charge customers, depending on their usage.
For example, if you use more than 750 units per year, your supplier cannot charge you more than £1,137 (for comparison purposes only; these figures change every quarter).
However, if you consume less than that amount of energy per year, your supplier can increase their charges by 5% each year.
If a certain plan becomes too expensive for an average consumer to afford, then they have three options: switch to a cheaper provider who offers a plan within their price cap; get power from renewable energy sources such as solar panels or wind turbines; or buy renewable energy credits which offsets pollution that occurs elsewhere.
When does it start to apply?
From April 1, 2019, Ofgem will control prices on standard and default tariffs (that is, all other tariffs) in Great Britain. This price cap will stay in place until 2020.
But if energy companies try to bump up their prices during that time, then Ofgem can step in and limit them again. Keep an eye on your bills for any savings.
If you see a rise that looks like it might breach the price cap or even come close to it, don’t hesitate to complain about it – especially if you haven’t switched supplier yet.
That way you can switch providers before being affected by a hike in prices, which will let you avoid paying over-the-odds for your energy costs.
Who will be affected by it?
The new Ofgem price cap, set at £1,500 in March 2022, will affect all suppliers who do not currently offer a cheaper tariff. So that includes everyone!
Don’t be fooled by some of your ‘Big 6’ suppliers claiming to offer cheap energy prices – because most of them will include other hidden costs in their tariffs which can make them more expensive than you realise.
Who decides on how much you pay for your energy bill each year?
Until now, you have had to put up with your energy supplier deciding how much you should pay for your gas and electricity each year.
From 1 January 2017, however, that all changes with a new price cap for standard variable tariffs (SVTs) brought in by Ofgem. The cap promises to save you money on your energy bills if you are on an SVT with an average dual-fuel bill of £2,000 per year or less.
What happens next?
If a supplier’s standard variable tariff is set to increase by more than £100, Ofgem will write to them and ask them what they are going to do about it.
The supplier has 21 days to respond. If Ofgem doesn’t receive a response, or if their response isn’t sufficient, they can apply price controls on that tariff for 12 months.
This isn’t expected to be an issue with any suppliers as even those currently charging over £1,000 have proposed price increases below £100 in future.
Ofgem Price Cap - The bottom Line
On March 22, 2022, Ofgem announced a new price cap for GB electricity customers from April 1st. The cap will stop energy companies from being able to charge more than £1,500/yr for electricity and £1,033/yr for gas.
Unfortunately, there is also due to be a further increase in October which could see the average energy cost hit £2,000 per year for many.