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What is the Energy Price Cap?
Updated: Sep 19, 2022
What exactly is the energy price cap? What does it do, and how does it help people in the UK? In this article, we’ll explain what the energy price cap is, and how it will affect you if you live in England, Scotland or Wales.
The Energy Price Cap Explained
The energy price cap limits how much you'll pay for gas and electricity if you're on a standard variable tariff.
It's designed to stop energy companies from charging you more than they need to, or hiking prices just because they think they can get away with it. This means your bills are capped to a certain degree.
However, there are some conditions which affect whether or not you will benefit from the policy:
How much energy does the average household in the UK use?
The average UK household uses around 3,100kWh of electricity and 12,000kWh of gas each year.
Who benefits from the Energy Price Cap?
The most obvious beneficiary of a price cap on utilities is consumers. A lot of people get their electricity from a company like E.ON or Scottish Power, and pay around 10 percent more than they would pay for an equivalent supply from one of these smaller suppliers with no upper limit to bills.
Under a price cap, there’s an annual ceiling below which you can never be charged for electricity – meaning your household budget stays stable regardless of what happens in wider market conditions.
You may still switch between suppliers; if one company offers a better deal than another, you can take it up immediately without penalty.
Under these rules, you will never pay more than the rate set by Ofgem in any given year – providing further protection and savings against unexpectedly high bills.
How does it affect retail customers?
The original price cap, which came into force on 1 January 2017, applies to anyone who buys gas and electricity from a standard or default tariff. This will save households around £100 each year on average.
The government has also confirmed that in 2020 there will be another safeguard tariff known as ‘Standard Variable Tariff’ (SVT). This will be based on delivery charges so your first 12 months won’t cost you more than today’s SVT prices.
So, for example, if your current supply charge costs about £2,000 a year, you can expect it to stay below that level even after 2020 – in other words at or close to today’s prices.
Who else will be affected by this change?
The government will be capping the amount of money people pay for their gas and electricity, but only some people will be affected by it.
Those who live in areas where there are no competitors to their local network will see prices rise to £1,137 a year by 2021-22 if they are on standard variable tariffs (SVTs).
However, those who live in areas with several different suppliers have options and can choose a cheaper tariff.
If they do so, they will not be subject to these costs. Customers on fixed rate tariffs have already been protected from SVTs by having them capped, meaning they pay no more than £1,137 per year on average.
Could there be further energy changes coming soon?
The Department for Business, Energy and Industrial Strategy has confirmed that a draft of a new report on consumer energy prices will be released by September.
This comes just a month after Ofgem announced they would be putting forward proposals to limit standard variable tariffs in July.
While it is not clear what these changes will entail, there are likely to be other implications for consumers.
On top of these measures to protect UK households from high bills, reforms have been introduced which have opened up an opportunity for new suppliers to enter the market.
UPDATE: It looks like we are set for even more changes when it comes to buying our electricity and gas supplies in 2022. The cap was increased in April 2022 to nearly £2,000 per household or 54% increase, and it is due to go up again in October.
Lack of supply and the War in the Ukraine are contributing to these recent high increases.