The Energy Price Cap

Big news today – OFGEM, the government regulator for gas and electricity markets in Great Britain, have announced there is going to be an increase in the energy price cap, meaning higher energy bills for all.

This increase in the price cap is due to come into effect in April 2021.

The energy price cap (also known as the default tariff cap or safeguard tariff) has been in place since 2019 and its aim was to try and help protect consumers against energy price hikes by the energy providers. In the following blog we are going to look into today’s announcement in more detail.

What is the energy price cap?

The energy price cap is a regulation set by OFGEM (the UK energy regulator) that all UK energy suppliers have to abide by. It is a limit on the unit rate and standing charge that energy suppliers can charge their consumers.

By setting a maximum price for each unit of energy, OFGEM should be helping households to save money on their gas and electricity bills. The price cap is reviewed twice a year – so while OFGEM is absolutely within its right to make the changes it has announced today –  the prospect of higher bills when people are already struggling against the backdrop of a global pandemic is less than ideal.

The energy price cap only applies to certain energy plans which are the standard variable tariff and the default tariff – these plans are typically the most expensive. The energy price cap also affects prepayment customers in the same way. In the UK there are 4 million consumers on a prepayment plan, and they have a separate cap rate which is reviewed independently of the SVT cap by OFGEM.

The cap rate itself is based on several factors that OFGEM review. These consist of the wholesale cost of energy, network costs, policy costs, operating costs and prepayment meter costs.

How much is the energy price cap increasing by?

Since the energy price gap was introduced in 2019, most energy suppliers have set their default prices very close to the maximum cap rate. Here are what the new maximum cap rates will be as of April 2021 –

Standard variable tariff and default tariff

The current cap is set at £1042 per year. The new cap will be set at £1138 per year, an increase of £96.

Prepayment plan

The current cap is set at £1070 per year. The new cap will be set at £1156 per year, an increase of £87.

How has the energy price cap changed previously?

Since 2019, when the energy price cap was introduced, the price cap has gone both up and down. In the table below you can see the previous energy price cap rates and how they have changed. It appears OFGEM are now set on reviewing the price cap in April and October of each year. We are obviously very hopeful the price cap will not be increased again in October 2021 as that would be a further blow to consumers pockets.

Why is the energy price cap a difficult subject?

1. The energy price cap can still be more than the amount of the cheapest energy deal out there, so sometimes better savings can be made by switching.
2. It prevents energy suppliers from competing. By changing the maximum cap rate, it discourages suppliers and they will be less likely to gain customers against other suppliers, because they will not be able to offer prevention of higher costs.
3. When reviewing, OFGEM can still change the cap rate based on the wholesale market, so the energy price cap does not give you security. A fixed rate energy plan is something to consider when comparing energy deals, as it will secure your rates and protect you from potential price increases.

As always – we strongly urge all readers to use energy comparison sites to check for better energy deals. It is worth remembering, there is no difference on the quality of the electricity or gas you buy from different suppliers – this never changes. The difference in price they charge you is based on the customer service they provide, so definitely check to see if their might be a better deal out there for you.

Likewise, just because the energy price cap is increasing, this doesn’t mean your energy bill has to incease. The energy cap doesn’t look at the number of units of electricity or gas you use, so if you install energy saving measures that mean you use less energy in the home (e.g. by installing better insulation, a more efficient boiler or installing LED lighting for example) then you should still see your energy bills falling.