What is the Energy Price Cap?
With effect from 1 April 2019 the Energy Price Cap has gone up by £117. If you are on a Standard Variable Rate or other default tariff you are now officially getting hammered with massively higher energy bills.
To avoid being hit with massively higher energy bills any longet you need to take action now.
Don’t leave it too late….the clock is ticking and every day means more wasted expenditure. And remember it will typically take 21 days or so for your switch to complete.
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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 is a cap on the per unit cost of gas and electricity, with standing charges taken into account.
It is NOT a cap on your energy bills which will still rise or fall in line with your energy consumption.
It is also NOT a cap in the standard sense that sets a price level above which prices can’t rise.
All this cap does is set a level above which default tariff rates can’t rise, for periods of 6 months at a time.
Confused? We sympathise.
Read on and we’ll do our best to explain.
What are Standard Variable Tariffs?
Standard Variable Tariffs, often also abbreviated as SVTs, are tariffs which customers who have never switched are placed on. They are also the tariff onto which a customer who, having switched and come to their tariff end date, will be placed onto unless they make a proactive decision to move to a different energy tariff or to switch energy supplier. Before the Price Cap came into effect, these tariffs where usually the energy supplier’s most expensive tariff meaning that customer who didn’t switch were effectively getting penalised with “rip-off rates” . Because of widespread disengagement in the energy market, the majority of customers (current estimates show over 50%) are still on these expensive tariffs.
What are Default Tariffs?
Default tariffs are other tariffs that customers find themselves on which they have not proactively agreed 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 doesn’t have to be. Default Tariff cover all other tariffs that fall into this general description.
When did the Energy Price Cap come into effect?
The 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 runs from 1 January 2019 through to 31 March 2019.
The second level of the energy price cap was set on 7 February 2019. It runs from 1 April 2019 through to 30 September 2019.
What is the level of the energy price cap?
That depends upon the how you pay your bills.
If you pay by monthly direct debit the energy price cap was set at a level of £1137 for a typical dual fuel customer. This will increase to £1254 from 1 April 2019.
If you pay quarterly by cash or cheque the energy price cap was set at a level of £1221 for a typical dual fuel customer. This will increase to £1344 from 1 April 2019.
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 is expected to save around £76 a year.
However, if you compare it with other competitive energy deals in the market then, then you are still paying between £200 and £300 a year over the odds. You can check how much exactly here.
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 you might be getting a better deal than if you did nothing, you are getting nowhere near the best possible deal, or even a half decent deal, by staying on a tariff covered by the price cap.
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Once the energy price cap is set is that it?
Afraid not. Energy supply is a volatile commodity based business – costs can fluctuate wildly in both directions. To allow for this the cap will be 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.
How often will the energy price cap be reviewed?
The price cap will be reviewed twice annually and updated on 1 April and 1 October each year. The updated cap level will be announced 2 months before it comes into force (in February and August of each year).
When will the energy price cap end?
The cap is supposed to be temporary. It will initially run until 2020.
Government can extend the cap for additional periods of 12 months at a time. Under current legislation, Government can extend the cap only three times so the cap must end by 2023. But of course that legislation could be amended.
In deciding whether to extend the cap the relevant Secretary of State will take into consideration a review and report, undertaken by Ofgem in 2020, as to “whether the conditions are in place for effective competition”. If the cap is extended then Ofgem would need to undertake further reviews in 2021 and 2022.
On what basis will Ofgem decide whether to recommend removal of the cap? Who knows? Ofgem have stated that they intend to develop a framework for how they will evaluate the prospect of effective competition, which is nice to know but tells us very little at this point.
However, it is telling that Ofgem has openly admitted that it expects the cap will reduce the level of switching meaning that, at least on this one measure, the “effective competition” condition will have worsened.
“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
How has the energy price cap level been set?
The cap will be set based upon using a bottom-up assessment of suppliers’ costs. Ofgem has set the cap with reference to the third lowest operating cost per customer amongst the ten large and medium energy suppliers that they analysed, with an additional (£5 per dual fuel account) efficiency factor to increase their incentives to reduce their average costs. (Ofgem’s assessment of efficient costs).
On top of their “efficient cost” base, Ofgem have allowed a normal rate of return before interest and tax of 1.9% (around half the current level).
Ofgem have 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.
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 (possibly years). 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. Follow this link.
If my energy prices are being capped why should I still switch?
The cap will help but it can only get you so far – a saving of £75 give or take. If you want to pick up the really juicy savings, another £200 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. Level 2 of the price cap which comes into effect on 1 April 2019, has been increased by £117. This means that Standard Variable Tariffs will be £42 higher than they were before the cap came into effect.