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What is the energy price cap and could I end up paying even more?

·7-min read
<span>Photograph: Yui Mok/PA</span>
Photograph: Yui Mok/PA

Millions of households face an 80% energy bill rise from 1 October after the regulator Ofgem increased the cap on prices to £3,549 a year.

And there is even worse news coming down the track, with the next announcement on what will almost certainly be an even higher cap – covering the first three months of 2023 – due on 24 November. That is, unless the government steps in before then.

Is £3,549 what I’ll be paying?

The new £3,549-a-year cap is based on a household with “typical consumption” on a dual electricity and gas bill paying by direct debit. It equates to a direct debit of almost £300 a month.

Crucially, it won’t cap someone’s total bill, which will still rise or fall in line with their energy use. This is something that has perhaps been overlooked in a lot of the coverage.

Ofgem is warning that while the new cap will take effect from 1 October, “it is possible some suppliers may begin increasing direct debits before this date to spread costs”.

Could I end up paying more?

Yes. Ofgem says the price cap is “not a cap on the maximum bill a household can be charged, which is based on their usage”.

For anyone with above-average energy use – for example, large families or older people in draughty homes – their annual bill could be even higher – maybe a lot higher – than the headlines suggest.

Interactive

Myron Jobson, a senior personal finance analyst at the investment platform interactive investor, says: “It is easy to focus on the headline energy price cap figure, but it is important to remember that no two households’ energy usage is the same.”

So what is the energy price cap?

It was introduced in 2019 and was designed to stop energy companies from making excessive profits. It sets the maximum amount energy suppliers can charge customers on so-called “default tariffs” – the most basic packages offered by energy companies.

Spool back two or three years and there were lots of energy deals available – usually dual-fuel fixed-price tariffs – that people could switch to where they could pay hundreds of pounds a year less than the cap level. And lots of people did just that, saving themselves a fortune.

The cap was really aimed at ensuring that “loyal customers” who – for whatever reason – did not shop around for a better deal were not ripped off as a result of staying on their firm’s standard variable tariff.

However, soaring wholesale energy prices have turned everything upside down. Those fixed-price deals that people signed up for typically ran for 12 or 24 months, and most of them will have expired by now, so about 85% of the population – roughly 24m households – are now sitting on default tariffs.

How does the cap work?

It limits the rates a supplier can charge for their default tariffs. These include the price for each kilowatt hour (kWh) of electricity and gas (the units your bill is calculated from), and also the standing charges (the amount charged each day to supply a household) that everyone has to pay no matter how much they consume.

In the current period (up to close of play on 30 September), a customer with “typical usage” paying by direct debit is being charged a maximum of 28p a kWh for electricity and 7p a kWh for gas. From 1 October those will rise to 52p and 15p respectively.

Meanwhile, electricity and gas daily standing charges are currently capped at 45p and 27p respectively, but will nudge up to 46p and 28p. However, the small print states that these rates “are averages and will vary by region, payment method and meter type”.

The other thing to mention is that the cap will be updated every three months, rather than every six months as has happened until now. So on 24 November we will find out what the cap will be for the key winter period from 1 January to 31 March 2023.

How does £3,549 compare with previous caps?

Last summer the cap was £1,138 a year. But then things started getting serious, and on 1 April this year it went up to £1,971 a year – a 54% increase. From 1 October it will be £3,549 a year.

The consultancy Cornwall Insight said this week it expected the cap to jump to £4,649 a year for the first three months of next year, then to £5,341 for April to June 2023.

The current £1,971-a-year cap equates to a monthly direct debit of £164.25, while the new cap figure takes that to £295.75 a month. A year ago the average monthly direct debit was just under £95.

How do I make it lower?

You will struggle to find tariffs cheaper than the current cap. But, according to MoneySavingExpert.com, there is the odd fixed-price deal available that you can lock into now that is cheaper than the gloomy predictions for where prices might go next year.

On Thursday afternoon the site was saying you could get a one-year fixed-price deal from Utility Warehouse that would typically cost £3,650 a year.

Larger households will typically pay a lot more for their energy than smaller ones. But other factors such as how energy-efficient your home is, plus, of course, your energy consumption, will have a significant impact.

“The most important thing consumers can do to save on energy bills is reduce the amount of energy you use. If you reduce the amount of energy you use, you reduce the amount of units you’re paying for,” said Jobson.

What help has government offered?

There is likely to be more help unveiled in the emergency budget that will almost certainly take place in September – or the government may choose to act before then.

Until then, there is the £400 discount on energy bills for all households that the government announced earlier this year (the energy bills support scheme). Assuming this isn’t increased or amended, this will be paid to consumers in instalments over six months, with households due to get the first chunk – £66 – applied to their energy bill in October. They will get another £66 discount in November. Then it will be £67 a month from December through to March 2023.

Officials say there is no need to contact your supplier as all domestic electricity customers will automatically be eligible.

For customers who pay by direct debit or after getting their bill, or with a payment card or via a smart prepayment meter, the discount will be automatically applied to the bill (or credited for smart prepayment meter customers) and no action is needed.

There is other assistance, too, such as the cost of living payments to help with the rising cost of energy and food that were announced by the government this year. However, most experts agree that much more help needs to be offered to households as soon as possible.

What about people on prepayment meters?

About 4.5 million domestic customers use energy prepayment meters, and many of them are on low incomes.

The price cap applies whether you pay by direct debit, after you get your bill or via a prepayment meter. However, in the case of the last group, their price cap has typically been about 2% higher than for direct debit customers.

Labour said this month it was “outrageous” that people on prepayment meters have to pay more, and it has said it would eliminate this “premium”.

A prepayment meter tariff means you pay upfront for your gas or electricity. You can typically top up using an app, by text or via a token or key/card at a shop.

Could I be cut off if I can’t pay?

Contact your supplier as soon as you can if you are struggling or think you may get into difficulty. Under Ofgem rules, suppliers must work with you to agree on a payment plan you can afford. For example, you can ask for payment breaks or reductions.

Citizens Advice says: “It’s rare to be disconnected, as your supplier will usually offer to install a prepayment meter instead.”

If you use a prepayment meter and cannot afford to top up, you can ask for emergency credit, AKA temporary credit. Your supplier might add this to your meter automatically – if they don’t, ask for it. If you run out of emergency credit, Citizens Advice says your supplier might give you extra if it agrees you are “vulnerable”.