What is the energy price cap? How does it work and how much is it?
Our simple yet comprehensive Energy Price Cap Guide answers those questions.
Last Updated : 24 May 2022
Energy price cap expected to rise by £830 to £2,800 in October 2022
In news that nobody wanted to hear, Jonathan Brearley, CEO of hapless, accident prone regulator Ofgem, told the Business, Energy and Industrial Strategy Committee, that the level of the energy price cap in October would be “in the region of £2,800.”
What he said, reading from a prepared script, was this….
“Conditions have worsened in the global gas market with Russia’s invasion of Ukraine. Gas prices are higher and highly volatile. At times, they have reached over 10 times their normal level.
Now I know this is a very distressing time for customers, but I need to be clear with this committee, with customers and with the government about the likely implications for October. Therefore, later today (being 25 May 2022) I will be writing to the Chancellor to give him our latest estimates of the price cap uplift.
Now this is uncertain. We are only part way through the price cap window, but we are expecting a price cap in October in the in the region of £2,800.”
What does a £2,800 energy price cap mean for consumers?
£2,800 seems a bit rich to us. Based on current forward wholesale energy prices we would be expecting something around the £2,500 – £2,600, but what do we know. (Although we did forecast the last energy price cap (for 1 April 2022) to within a few percentage points. So maybe…?
Anyway, if the 1 October 2022 energy price cap really is hiked up to £2,800, here are the unpleasant stats you probably wanted to avoid reading.
- Energy bills will have increased by 119% year-on-year.
- This increase on its own (first order effect) will add 3.1% points to CPI. On its own. To put that into context, the Bank of England has a target rate for inflation 2%. Energy bills will blow that out of the water by over 50%. And energy bills only account for 1/40th of the inflation basket.
- The monthly energy bill for a household with average usage will £233 / month.
- Energy consumers will be paying £48 billion more on their energy bills compared to 2 years earlier.
BUT, one lucky individual will be banking an additional £2.6 billion a year (compared to October 2020) in VAT receipts on those higher bills. That’s an extra £7m in additional energy VAT receipts every single day. Lucky for some.
Energy Price Cap – 1 April 2022
The energy price cap increased by 54% (£693) on 1 April 2022
Here are the key points for the 1 April 2022 increase.
- From 1 April 2022, households with average energy usage, paying by monthly direct debit, saw their energy bills increase by £693 to £1,971. That’s a massive 54% increase.
- This increase is on top of the £96 increase on 1 April 2021 and the further £139 increase on 1 October 2021. Three increases in a row adding £928 to energy bills in a little over a year.
- For a household with average energy usage, that means an extra £58 per month on you energy bill.
- Those paying by prepayment meter, or quarterly by cheque, did even worse. Their new energy bills increased to £2,017 and £2,101 respectively.
- This increase affects 22 million households to the tune of over £15 billion a year. 5 to 6 million households are currently unaffected by virtue of being on fixed rate tariffs. However, these increases will work their way through the rest of the population as and when those fixed deals expire.
- This is the 8th iteration of the cap since it was introduced on 1 January 2019. Barring any emergency circuit-breakers, the new cap will run from 1 April 2022 through to 30 September 2022.
Why did the energy price cap go up by so much?
It is mainly, although not exclusively, due to massive increases in wholesale gas and electricity prices. Something we have been warning about for months.
The primary driver of the increase was a £549 (104%) increase in wholesale energy costs. No surprise there.
But Network Costs also increased by 38% adding £103 to the price cap. The main driver of Network Costs (£68) was the recovery of Supplier of Last Resort (SoLR) levy costs. This is where the new energy supplier picks up the tab for rescuing a failed energy supplier and then hands the bill onto everyone else. Ofgem’s and BEIS’s laissez-faire attitude to energy supplier failures is coming back to bite the consumer harder and sooner than expected.
Operating costs were also £17 (8%) higher. This is not supposed to be happening given that the energy price cap is supposed to be driving down supplier costs.
Finally, and this is going to leave a very bitter taste, VAT paid to the Treasury added an extra £33 to the bill.
The energy price cap is set to increase again on 1 October 2022. The clock is ticking…
What is the Energy Price Cap?
The Energy Price Cap is a cap on the rates that licensed energy suppliers can charge to customers who are on either Standard Variable Tariffs or other Default tariffs.
The energy price cap sets a limit (a cap) on the maximum amount that energy suppliers can charge for each unit (kilowatt hour) of gas and electricity. It also sets maximum daily standing charges (the costs associated with having your home connected to the energy grids).
However, it is NOT a cap on your energy bills, which will still rise or fall in line with your energy consumption. Use more energy and you will pay more. Use less, and you will pay less.
It is also NOT a cap in the standard sense that sets a price level above which prices cannot rise.
All this cap does is set a level above which default tariff rates can’t rise. But these levels are only set for periods of 6 months at a time. They are then reviewed and reset.
Confused? We sympathise.
Read on and we’ll do our best to explain in this Energy Price Cap guide.
What are Standard Variable Tariffs?
Standard Variable Tariffs, often also abbreviated as SVTs, are tariffs which customers who have never switched are placed on. You will usually find yourself on one of these tariffs if;
- you’ve never switched before
- you’ve switched but then don’t switch again when your tariff ends
- you move home and don’t pick a new energy supplier or tariff
You might also end up on a Standard or Default tariff (see below) if your energy supplier goes bust and the new energy supplier doesn’t offer you a cheaper alternative deal. All energy supplier failures since September 2021 have resulted in energy customers being moved onto Standard or Default tariffs.
Traditionally, these tariffs where usually the energy supplier’s most expensive tariff meaning that customer who didn’t switch were getting penalised with “rip-off rates”. Often to the tune of £100s/year more than cheaper alternatives in the market.
Because of widespread disengagement in the energy market, the majority of customers (typically over 50%) would be on these expensive tariffs. Since August of 2021, when the current energy crisis started to unfold, the situation has changed materially, As energy suppliers have failed in their droves, their customers have been forcibly shifted onto the Standard Variable Tariffs of whichever energy supplier stepped in to take over the customers’ accounts. It is currently estimated that 22 million households – some 80% of all households – are currently on these tariffs.
What are Default Tariffs?
Default tariffs are other tariffs that customers find themselves on which they have not proactively signed up to. So, for example, if your tariff ended and you never made a new tariff choice, either by switching or moving to a new tariff with your current energy supplier, then your supplier will place you onto a deal not of your choosing. Typically, this will be their Standard Variable Tariff (see above). But it could be a different energy tariff. Default Tariff cover all the other tariffs that fall into this general description.
When did the Energy Price Cap come into effect?
The energy price cap was introduced by an act of Parliament called The Domestic Gas and Electricity (Tariff Cap) Act which came into force on 19 July 2018
The first level of the Price Cap was set on 6 November 2018. It ran from 1 January 2019 through to 31 March 2019.
Once the energy price cap is set is that it?
Afraid not. Energy supply is a volatile commodity-based business – costs can, and do, fluctuate wildly in both directions. To allow for this, the cap is reviewed at regular intervals to allow for changes in suppliers’ costs such as wholesale energy prices, network charges, and the costs associated with funding government policies (both social and environmental).
How often is the energy price cap reviewed?
The price cap is reviewed twice annually and updated on 1 April and 1 October each year. The updated cap level is announced 2 months approximately, before it comes into force (in February and August of each year).
Since the energy price cap first came into effect, we have already had 7 changes. The energy price cap, which is rising by 54% from 1 April 2022, is the 8th iteration of the cap.
How has the energy price cap changed over time?
A full history of current and historic levels of the energy price cap are given in the bale below. Additional tables at the bottom of this page show the detail of the cap split out by fuel type and payment method.
|Energy Price Cap Version||Runs from||Runs until||Price Level -|
|Price Level - |
|Net change -
|Pre-cap opening level||On 31 Dec 2018||1,221||1,179|
|v1||1 Jan 2019||31 Mar 2019||1,137||1,104||£75 cut|
|v2||1 Apr 2019||30 Sep 2019||1,254||1,217||
|v3||1 Oct 2019||31 Mar 2020||1,179||1,143||£74 cut|
|v4||1 Apr 2020||30 Sep 2020||1,162||1,126||£17 cut|
|v5||1 Oct 2020||31 Mar 2021||1,042||£84 cut
|v6||1 Apr 2021||30 Sep 2021||1,138||
|v7||1 Oct 2021||31 Mar 2022||1,277||
|v8||1 Apr 2022||30 Sep 2022||1,971||
|Source; energyscanner.com, |
When will the energy price cap end?
The cap was supposed to be temporary. It was initially set to run until the end of 2020.
Government had the option extend the cap for additional periods of 12 months at a time. Under current legislation, Government can extend the cap only three times so technically the cap must end by 2023. But, of course, legislation always be changed.
The cap has already been extended several times. Further, as part of its Energy Retail Strategy, the department for Business, Energy and Industrial strategy (BEIS) announced its intention to enable future extensions of the Energy Price Cap beyond 2023, if needed.
This may be a bit of a formality now but, in deciding whether to extend the cap the relevant Secretary of State is expected to take into consideration a review and report, undertaken by Ofgem in 2020 and then (if applicable) successive years, as to “whether the conditions are in place for effective competition”. As and when the energy price cap is extended, Ofgem then undertakes further 6 monthly reviews.
Will the energy price cap ever be removed?
On what basis will Ofgem decide whether to recommend removal of the cap? Ofgem have developed a framework for how they evaluate the prospect of effective competition. But the simple, but unfortunate, reality is that a decision on the fate of the energy price cap is ultimately a purely political one. At a time of record high energy prices, we doubt whether any self-serving politician has the balls the remove the cap even if that was the obvious and sensible thing to do.
It was telling that, right from the outset Ofgem openly admitted that it expected the energy price cap would reduce the level of switching. This means that, at least on this one measure, the “effective competition” condition would never be triggered.
“We expect that under a cap, switching levels would have been lower, by up to 50%.”
Ofgem, Statutory Consultation – Default tariff cap – 6 September 2018
If you then effectively bankrupt 27 energy suppliers in 12 months, with the market consolidating around the fewest largest players, it seems likely that the “effective competition” condition may never be met.
So, for now, the energy price cap remains in place. And like all temporary government measures, it now looks to be permanent.
How is the energy price cap calculated?
The cap is set based upon using a bottom-up assessment of suppliers’ costs. Ofgem sets the cap with reference to the third lowest operating cost per customer amongst the ten large and medium energy suppliers that they analyse, with an additional (£5 per dual fuel account) efficiency factor to increase energy supplier incentives to reduce their average costs. (Ofgem’s assessment of efficient costs).
On top of this “efficient cost” base, Ofgem has allowed a normal rate of return, before interest and tax, of 1.9% (around half the current level).
Ofgem has the added a further £12 per dual fuel customer of “headroom” allowance to help energy suppliers manage additional costs of uncertainty.
What that basically means is that, of the largest players, at least 7 will need to urgently cut into their cost base to avoid running into losses. And for those suppliers whose costs are more than 2% above the efficient level, they are going to be running into losses sometime very soon.
How much will the energy price cap save me?
Well that very much depends on what you are comparing it with.
If you compare it to where Standard Variable tariffs would have been without the cap, then the Energy Price Cap was expected to save around £76 a year. And was is the key word here. We will park that here and get back to it shortly.
However, if you compare it with other competitive energy deals in the market then, then you are still paying between £200 and £400 a year over the odds.
The figures quoted above are for a dual fuel customer with a standard electricity meter with average energy usage. The exact amount will depend on variables such as your current energy supplier and tariff, how you pay your bills and how much energy you use.
So, in summary, although energy consumers were supposed to be getting a better deal than if you did nothing, the cap was never designed to get you a half decent deal.
That is how it was supposed to work. A slightly better deal for those that don’t switch but nowhere near a great deal. However the outcome to date has been a shocker As this graph of energy savings shows, consumers are worse off under the price cap than they were without it.
Does the energy price cap mean the end of No Standing Charge tariffs?
Yes, it pretty much kills them off. For default tariffs in any case.
The energy price cap has separate caps for standing charges and units rate components.
Suppliers have some flexibility in how they choose to price but the price cap will make it extremely difficult from a profit perspective to reduce the standing charge component to zero. Some customers with low energy usage will actually see their energy bills increase because the energy price cap.
I receive the Warm Home Discount. How will the default price cap affect me?
Customers on SVTs and default tariffs who receive the Warm Home Discount are currently covered by the Safeguard tariff.
Customers currently receiving Warm Home Discount and on the existing Safeguard tariff, will have their prices capped at the default cap rate for direct debit customers.
SafeGuard tariffs were introduced in April 2018 as a temporary measure and are due to be replaced either by this price cap or other safeguard tariff.
I have a prepayment meter. How will the default price cap affect me?
If you have a prepayment meter then you are already covered by the Competition and Markets Authority’s (CMA) Prepayment Price Cap. As such the default tariff cap does not affect you.
The exception is you if have a SMETS2 smart meter operating in prepayment mode. For some bizarre reason you currently do not get protection from the Prepayment Price Cap. Don’t ask us why, we don’t know. In this case you will be put onto the default cap rate for direct debit customers.
Is there anything else that I need to know about the energy price cap?
Well if that wasn’t already complicated enough, British Gas has decided to mount a legal challenge to the energy price cap, arguing it has not been calculated fairly by Ofgem. This legal challenge, referred to as a judicial review, will take a while to work through the courts. However, if British Gas is successful and wins its case it will likely be given the right to make a claim for damages for any amount by which the cap was set too low. This could mean recovering back revenues from customers. This is another reason why you may not want to hang around on a Standard Variable Rate or default tariff.
Do you have a handy table showing me the level of the energy price cap by fuel and payment method?
Sure we do. They are at the bottom of the page.
If my energy prices are being capped why should I still switch?
The cap was intended to help you get a saving of £75 give or take. The reality is that not only has it not done that, it has ended with you over-paying by more.
If you want to pick up the really juicy savings, another £200 to £350 on top, then you need to find those precious 5-10 minutes to do a comparison and switch energy supplier.
The really important thing is to NOT let yourself get lulled into a false sense of security – thinking that the cap will get you a great deal. It won’t. If you fall into that trap you will simply end up overpaying year after year after year.
And remember, the cap DOES NOT mean that your prices will fall and stay low. They can and will rise and they are NEVER low.
If I want to switch to a cheaper energy deal what should I do?
Easy. Here are 2 quick and simple ways in which you can do it. Just pick the one that suits you best.Option 1. See how your tariff compares before applying. Click here...
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And finally some data….
Price Cap Levels
Energy Price Cap – 1 April 2019 – 30 September 2019
|Energy Price Cap (Default Tariff Cap) v2|
|7 Feb 2019|
1 Apr 2019
30 Sep 2019
|Fuel||Direct Debit Bill (£)||Change (£/%)||Standard Credit Bill (£)||Change
|Electricity (standard meter)||661||+66|
|Dual Fuel (standard meter)||1,254||+117|
|Electricity (economy 7 meter)||815||+84|
|Dual Fuel (economy 7 meter)||1,408||+135|
|Source; energyscanner, Ofgem|
Energy Price Cap – 1 January 2019 – 31 March 2019
|Energy Price Cap (Default Tariff Cap) v1|
|6 Nov 2018|
1 Jan 2019
31 Mar 2019
|Fuel||Direct Debit Bill|
|Standard Credit Bill
|Electricity (standard meter)||595||639|
|Dual Fuel (standard meter)||1,137||1,221|
|Electricity (economy 7 meter)||731||781
|Dual Fuel (economy 7 meter)||1,273||1,363|
|Source; energyscanner, Ofgem|