How Will The October Energy Price Cap Affect You?

The UK is officially in an energy crisis, gas and electricity prices are going through the roof, suppliers are going bust, and there is a lot of talk about the price cap.

But what exactly is the price cap, and how does it affect you? We hope to answer some of the questions that may be playing on your mind.

What is the price cap?

The UK energy industry regulator Ofgem sets the price cap to limit the rates a supplier can charge customers for their default tariffs. These include the standing charge and price for each kWh of electricity and gas (the units your bill is calculated from).

Ofgem sets the cap level twice a year — for summer and winter — based on the underlying costs to supply energy. The price cap aims to make sure you pay a fair price for your energy, stop energy companies from making excessive profits and ensure they reflect any drops in their costs in your rates.

Since the government introduced the energy price cap in January 2019, most suppliers have set their default prices very close to the maximum cap rate.

Why is there an energy price cap?

Customers who don’t shop around for the best deals can get stuck on their supplier’s basic default energy tariff. This can often put them at a disadvantage in the energy market. The price cap ensures fair prices, especially for these customers.

How does Ofgem set the price cap?

Ofgem sets the level of the cap based on a broad estimate of how much it costs an efficient supplier to provide gas and/or electricity services to a customer.

The price cap is updated every six months to reflect changes in underlying costs and any increases in inflation.

Ofgem’s calculations cover:

• wholesale energy costs
• network costs of building, maintaining and operating the pipes and wires that carry energy across the country to your home.
• policy costs: the costs related to government schemes to save energy, reduce emissions and encourage take-up of renewable energy
• operating costs for suppliers to deliver billing and metering services, including smart metering
• payment method uplift allowance: the additional costs incurred through billing customers with different payment methods
• headroom allowance: this allows suppliers to manage uncertainty in their costs
• Earnings Before Interest & Taxes (EBIT): a fair rate of return on suppliers’ investments
• VAT: 5% tax added to the tariff

Does the price cap affect me?

The energy price cap is backstop protection from the government, calculated by Ofgem.

It applies if you’re on a default energy tariff, but it won’t apply if you:

• are on a fixed-term energy tariff
• have chosen a standard variable green energy tariff Ofgem has exempted from the cap.

At Efficient Homes, we recommend contacting your supplier to check if you are on their default tariff. If you’re not, you may already be paying a better rate for your energy. But it’s still worth checking if you could save more by switching to another tariff or supplier.

Why is the energy price cap controversial?

There are a few reasons why the energy price cap has come under fire from experts:

1. Better savings can be found by switching. So it takes the onus away from innovation and customer service for suppliers.
2. It gives a false sense of security. As we can see, the price cap can still go up (or down) due to wholesale costs, distribution costs and many other factors. The concern is that some consumers may assume the price cap means they are protected from fluctuating costs.

Will my bills fall or rise under the October price cap?

A new cap rate of £1,277 was announced in August 2021. This 12% increase will come into effect in October 2021. So, if you are on a variable tariff, your bills are very likely to go up.

If you’re on a fixed price contract, but it is due to end soon, you’ll also probably have to change to a more expensive deal.

Not only has the cap level risen twice in the same year for the first time, but the level is at its highest ever point (£23 more than its previous high point of £1,254). This is largely because of the rocketing price of wholesale energy.

The cap rate is based on a typical dual fuel customer paying by direct debit. Your energy usage will, of course, affect your total bill too.

Will my bills continue to rise next year?

Probably. Although energy suppliers are not allowed to increase prices for six months (Oct ‘21-Mar ‘22), the price cap is below wholesale prices at the moment, and some suppliers are selling energy at a loss. Therefore the cap is very likely to go up again. If wholesale energy continues to rise, the cap will go up a lot more.

Experts have warned that prices could stay at “exceptionally high levels this winter” and throughout 2022. This will have a devastating effect on many UK households, plunging even more families into fuel poverty.

How can I stop my bills from escalating further?

The only sure way to stop your bills from rising is to take control of your energy supply and install an independent clean energy system like solar panels and battery storage. That way, your power will always be free of cost to you!

To find out more about solar panels for your home, contact us here.