Energy Price Cap

April 30th, 2020
Energy

Energy price cap explained

If you’re responsible for paying your household’s energy bills, then you need to be aware of energy price caps in the UK.

Your energy supplier won’t necessarily tell you about the best tariffs available to you and you may be perfectly happy with the service that you’re getting from them. But are you aware that wholesale energy costs can rise and fall, often quite substantially? And that has a knock-on effect on the price you should be paying.

Punished for loyalty

It’s estimated that over half of the households in the UK have switched energy suppliers less than twice. Many customers have never switched at all, so they won’t be benefiting from the most favourable and cost-effective tariffs. The government energy price cap is designed to ensure that all customers pay a fair price for the energy they use, preventing them from paying extortionate prices.

Compare and see how much you can save on your energy bills

What is the energy price cap?

Twice a year, the government sets price caps on the amounts that energy suppliers can charge their customers. The price cap is set per unit kWh used, and suppliers are not allowed to charge more than the capped limit. The aim is to make this the starting point for a series of energy supply reforms. Eventually, the government hopes to enable faster switching between energy suppliers, together with promoting the rollout of smart meters, which it’s hoped will enable everyone to benefit from the best deals.

How does energy price cap work?

Capping energy costs mean that suppliers can’t charge customers more than the capped amount per unit of energy used. But there’s no cap on the size of a customer’s individual bill, so those who use more energy will still face higher bills.

There are two main types of energy price cap:
  • Prepayment price caps, also known as safeguarding tariffs, apply to anyone using a prepayment meter to pay for their energy
  • Default tariff price caps apply to anyone on standard variable tariffs, or default tariffs that they haven’t chosen themselves.
Pros and cons

The main advantage to capped energy costs is that customers will always be assured of paying a fair price. And in the case of vulnerable customers, in particular, this can only be a good thing, ensuring that they don’t end up spending more than they can afford on heating and lighting their homes.

Another advantage is that falling energy costs from wholesalers are passed on to customers too, rather than energy suppliers benefiting from suddenly increased margins.

But there are some downsides to price caps too. It’s feared that capping energy prices could have a negative effect on some energy supply companies, particularly the smaller ones. If some suppliers go out of business, that starts to create monopolies which isn’t so good for customers as it limits their choices.

Some customers may wrongly assume that a capped energy tariff offers the same benefits as switching tariffs or suppliers, but this isn’t the case. It can often be cheaper to lock into a fixed-price tariff as the energy cap is often higher than fixed tariff costs.

Some experts believe that capped energy prices could lead to higher fixed-rate tariffs, as energy suppliers attempt to claw back the profits that they’re accustomed to. So it pays to shop around and keep checking to see which tariffs are most suitable for your current needs.

How are caps calculated?

Caps are based on a number of factors, including wholesale energy costs, tax, supply networks and environmental issues. Suppliers have to be able to make a profit, but customers must be protected from paying more than they should for their energy supply.

Caps rise and fall, according to wholesale costs, with the government setting the caps twice a year and adjusting them according to market needs.

What is my current tariff?

If you look at your most recent energy bill, it should provide details of your current tariff, together with the cost per kWh. If you don’t have a copy of your bill to hand, your energy supplier should be able to help you out. You can phone or email them or, in some cases, there might be a live chat option.

To find out who supplies your electricity, head to the website for the Energy Networks Association, which provides a useful postcode search tool.

To find out who supplies your gas, search online for the Meter Point Administration, which offers a free search tool. Or if you prefer, you can telephone 0870 608 1524. Calls are charged at 7p per minute, plus your phone provider’s access charges. The service is also able to provide you with your MPRN, or Meter Point Reference Number, which enables your energy supplier to locate the meter.

Your tariff won’t be capped if you’re signed up to a fixed-term energy tariff, or if you’ve made the choice to sign up to a standard variable renewable energy tariff. But if you’re approaching the end of a fixed-term contract, now is a good time to start thinking about your options and possibly switching to a tariff that is price capped.

Compare and see how much you can save on your energy bills

4000+ reviews