When the Government introduced the Energy Price Guarantee (EPG) in October 2022, it temporarily took over Ofgem's Energy Price Cap.
But from 1 July 2023 the Price Cap will fall below the EPG, meaning gas and electricity prices charged by energy suppliers will follow this mechanism.
But how does the Price Cap work, and what does it mean for your energy bills going forward?
History of the Price Cap
The price cap was first introduced by Ofgem in April 2017. At the time, it was designed specifically to protect vulnerable households on prepayment tariffs from being charged too much for their energy. Known also as the ‘safeguard tariff’, it placed a restriction on the amount suppliers could charge their prepayment customers for a given level of consumption.
On 1 January 2019, Ofgem extended this price cap to also cover all customers who were on their suppliers standard variable tariff (SVT), and re-named it the ‘default tariff cap’.
What is the energy price cap?
The energy price cap sets a maximum price that a supplier can charge its customers for each unit of energy (measured by kilowatt hour or kWh) they use while on their default tariff. The cap also includes a maximum price that can be applied for a supplier’s standing charge (the fixed daily amount you pay to stay connected to the grid).
Prices set by the cap are based on wholesale costs (the price energy companies pay for energy) and applies to an energy provider's standard variable tariff (also known as a default tariff) across both credit and prepayment meters.
What is the current energy price cap?
On 25 May 2023, Ofgem announced the energy price cap would be set at £2.074 for the period 1 July – 30 September 2023 This figure is based on an annual bill for direct debit customers using dual fuel (meaning that home uses both gas and electricity).
For a dual fuel customer with a prepayment meter, the cap has been set to £2,077.
These values include VAT and are calculated using Ofgem’s Typical Domestic Consumption Values (TDCV) - currently 2,900kWh of electricity and 12,000kWh per annum of gas.
What are Typical Domestic Consumption Values (TDCV)?
Typical Domestic Consumption Values (TDCVs) are overseen by Ofgem and used as a benchmark to help customers and suppliers estimate and compare average energy use for a typical household in England, Wales, Scotland, and Northern Ireland.
TDCVs are always only estimates, and your actual energy use may be higher or lower than what is considered typical consumption.
Why was the Price Cap introduced?
The Ofgem energy price cap was brought in to act as a safety net for customers who do not regularly switch energy providers and remain on their existing supplier’s standard variable or default tariff, which is typically a supplier’s most expensive tariff.
The aim of the Price Cap was to ensure these customers still get their energy at a ‘fair’ price. However, variable and default tariffs set at Ofgem’s Price Cap level are still some of the most expensive deals on the market. The cost of variable and default tariffs has led to the price cap facing increased scrutiny, with many concluding the cap serves to benefit large and well-established suppliers. Although the cap includes 1.9% in earnings before interest and tax (EBIT) for suppliers, smaller energy providers who entered the market were able to beat the price cap by several hundred pounds, highlighting that these fixed-cost allowances were overly generous.
How is the Price Cap calculated?
The Price Cap is set by Ofgem and uses estimates of varying costs they believe suppliers will face over the following price cap period, which is three months. The biggest cost to be factored in is the wholesale price of energy, followed by network costs, supplier operating costs, payment method costs, and the costs of government policy. These costs are all passed on to the customer.
The price cap also allows an element of supplier profit of just over 1.9% of revenue, as well as VAT, added in at 5%.
Ofgem adjustment allowance
The ‘adjustment allowance’ is included by Ofgem and rolled into the Price Cap to cover for any unexpected costs, such as supplier failures.
For example, when a supplier fails, a new energy supplier is appointed to take over by Ofgem under the 'Supplier of Last Resort (SoLR)' process. Using what is known as the 'Supplier of Last Resort levy', the SoLR is allowed to claim on costs it incurs as a result of taking on the customers of the failed supplier.
These costs are rolled into the price cap and passed on to customers via standing charges (the daily amount all energy customers pay to stay connected to the grid).
A report released by the UK House of Commons showed that the April 2022 energy price cap included an SoLR levy cost of £68 per customer for the 22 suppliers that failed between September and December 2021.
How do I know if I am on a Price Cap tariff?
The Price Cap applies to 'default' tariffs. Also known as standard variable tariffs (SVTs), a default tariff is one you do not actively choose to switch to (unlike a fixed deal). You will likely be on your supplier’s SVT if:
You've never switched your energy tariff before
If If you have always been with the same supplier, you will be on that supplier’s SVT. You will also be on the SVT if you moved home and never made any changes to the existing gas and electricity supply.
You were on a fixed deal but haven't chosen to switch to a new supplier
If you were on a one- or two-year fixed deal with your supplier but did not switch to a new supplier once the fixed period ended, you will have been automatically rolled onto the standard variable tariff of the supplier who you had the fixed deal with.
Will I save money with a low energy price cap?
On the surface, it might seem that you’d make a saving but proceed with caution. Claims of savings reported in the press are often generic and do not take individual circumstances into account.
The important thing to remember is that the Price Cap only sets the limit on the maximum amount energy suppliers can charge per unit of gas and electricity that you use, as well as a maximum daily standing charge (what you pay to keep your home connected to the grid) . It does not cap how much energy you use, which, depending on your circumstances, could go above the estimated prices of the Total Domestic Consumption Value (TDCV). If you use more energy than the estimate you can expect a higher energy bill.
It’s also important to bear in mind that the amount you’ll pay for the daily standing charge depends on several factors, - where you live, the type of tariff you’re on and your energy supplier.
Does an energy price cap apply to my fixed rate tariffs?
No. Most fixed tariffs are usually priced below the cap.
If you remain with your existing supplier after your fixed deal has expired, you will automatically be rolled onto that supplier’s standard variable tariff (SVT).
This means that if the price cap increases while you’re on the SVT, you’ll be vulnerable to higher energy unit rates. Conversely, if you’re on the SVT when a lower energy price cap comes into effect, your supplier will have to lower its prices to match the cap.
How many energy price caps are there every year?
The Price Cap used to be updated every six months, but since October 2022 has changed to every three, with Ofgem stating that a quarterly review would Mean that what customers are charged on their bill provides a ‘better reflection’ of current gas and electricity prices and will allow suppliers to ‘better manage their risks’.
How long will the Price Cap remain in place?
The Price Cap was originally introduced as a short-term solution, and only intended to remain in place until the end of 2020. However, the cap has continued since 2020, with the UK Government announcing earlier this year that the Price Cap will continue into the remainder of 2023 and be extended beyond 2024 if deemed necessary.
Does the price cap work?
Unfortunately, no. It is reasonable to expect that customers will want energy prices to be as low as possible, and to meet this demand, it may seem an attractive prospect to set price caps at a low level. However, if the cap is set too low, energy suppliers – especially those operating on a small-to-medium scale - struggle to recover the costs they pay for energy on the wholesale market, resulting in them operating at a loss. This can not only lead to forcing existing players out of the market, but also acts as a deterrent to new suppliers from entering.
A price cap can also drive down the incentive for customers to want to interact with the energy market.
In November 2017, and after observing the prepayment meter (PPM) price cap for the six months since its introduction, Centrica reported that prices for energy were bunching around the cap, with average prices from suppliers within £15 of each other. This meant that customers had little incentive to engage in the market and search for the best deal, because of the lack of savings that would come from switching to a new supplier.
Does the price cap mean I shouldn’t switch?
Although the existence of the price cap can be viewed as having a negative impact on the energy market, it does not mean you can’t switch to a better deal.
With Switchcraft, we’ll not only find you the best possible energy deal, we’ll also switch you automatically. Sign-up now to see if you could be paying less for your energy.
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