March 1, 2019

Energy Price Cap? Ofgem Energy Price Cap Explained

The energy price cap limits how much energy suppliers can charge you per unit of energy if you are on the suppliers default tariff or standard variable tariff (SVT). These are the more expensive tariffs you get automatically rolled onto when your first deal has ended. So if you’ve been with your current supplier for month than 12 months, this is probably the tariff you are on – along with 11 million other households across the UK!

Will the Ofgem energy price cap limit my bill?

The energy price cap does not limit the total cost of your bill. Your bill is still determined by how much energy you use. What the price cap is trying to do is ensure customers who never switch supplier pay a fairer price for their gas and electricity.

The first energy cap started on January 1st 2019, with the cost for ‘typical use’ set at £1,137 per annum. However, the level of the cap is going up again on the 1st April by 10% meaning the cap will rise by £117 on this date!

This is because the way the cap is calculated includes the wholesale cost of energy (which is what your supplier pays for the energy they sell on to you), and this has risen by around 20% during the period used to calculate what the cap should be. So, while the cap brought tariffs down by around £75 for a typical household on Jan 1st, the increase coming on April 1st is going to more than reverse that saving, pushing bills back up to £1,254 per annum.

And remember, Ofgem themselves say "Even greater savings are to be had if you switch."

Who is Ofgem?

Ofgem is the Office of Gas and Electricity Markets. Their principal objective is to protect the interests of electricity and gas consumers.

Ofgem:

●      Promotes value for money

●      Improves the security of energy supply and sustainability

●      Supervises new energy markets and competition

●      Regulates government energy schemes

What is the Ofgem energy price cap?

The energy price cap limits how much energy suppliers can charge you per unit of energy if you are on the suppliers default tariff or standard variable tariff (SVT). These are the more expensive tariffs you get automatically rolled onto when your first deal has ended.

The energy cap does not limit the total cost of your bill - your bill is determined by how much energy you use. Also, the level of the cap is reviewed every three months, and if the cost to supply energy falls, energy suppliers will have to pass on these savings to their customers. (Rightly so). But if costs rise, the cap will also rise - but to a level prescribed by Ofgem, not your supplier.

How does the Ofgem energy price cap work?

● Every six months Ofgem work out how much it costs for suppliers to supply you with energy (This can me more frequent than 6 months as we have already seen)

● Cap levels are then revised, making sure you pay a fairer price

● Energy suppliers must cut their prices to below the cap.

- Most suppliers will set their price very close to the cap limit (within £1-£3).

- Other tariffs offered by suppliers, eg: Fixed Tariffs can still be more expensive than the cap!

● If costs fall, the cap make sure suppliers pass on savings

● If costs rise, Ofgem will make sure any increase is ‘appropriate'

Am I covered by the cap?

Ofgem’s price cap will only apply to you if you use a pre-paid meter, get the government’s Warm Home Discount or are on a standard variable energy tariff or default tariff. This equates to an estimated 11m customers, roughly 40% of UK households.

If you don’t fall into one of those groups you still need to check your tariff – and don’t think you’re OK because you are on fixed tariff, as many of these are now more expensive than the level of the cap.

Does the cap affect how much energy I use?

No. The price cap has no effect on how much energy you use, and how much you pay will depend on how much you use. Remember, the Ofgem price cap sets the price for each unit of energy, not your monthly bill.

Here’s another way of looking at it: Imagine there was a price cap on a cup of tea (or coffee), which was £1. You’ll only ever pay £1 for one cup of tea, but the more cups of tea you drink, the more you have to pay out. One unit of energy = one cup of tea.

Take a look at this shorter edited video from Ofgem explaining how it works:

Will the price cap limit my bill?

If you are on one of the tariffs covered by the cap then you should have seen a slight reduction in your costs since January 1st. But the actual amount you pay will always depend on how much energy you use and to minimise the amount you pay you need to look at switching suppliers.

Someone paying £1,137 under the cap could reduce their annual bill as low £921 – that’s a saving of £216 - by moving to the best available tariff.

Take a look at below infographic from Ofgem showing some of the savings. Note the point on better saving to be had if you switch and don’t forget:

(Link to full PDF Infographic version)

 

Is the cap level fixed?

Only for a few months at a time. The current cap level became effective on January 1st, and Ofgem announced on February 7th that the cap level will rise again by 10% from April 1st.

This announcement confirms a £117 rise in the level of the cap from £1,137 to around £1,254.

Is a cap that regularly changes really a cap at all? Well, it’s easy to criticise the cap, but Ofgem have the difficult task of trying to keep it at a level that protects customers who don’t switch, while enabling suppliers to provide energy at a price that’s sustainable for them.

Why it still pays to switch energy suppliers

Just because a cap is in place, it doesn’t mean these tariffs are now ‘a good deal’. There are better deals to be had which could save you hundreds of pounds.

Even the Ofgem website says you should be shopping around: 

“Even if you are covered [by the energy price gap], you should still see what other deals are available. That’s because gas and electricity suppliers may be able to offer different tariffs that could be better for you, and save you more money.” 
“We still recommend you shop around for the best energy offers. It is likely there will be offers which could save you even more money on your gas and electricity than sticking with a contract covered by the price caps.”

 

Ofgem is openly encouraging people to shop around for the best energy deal, and we can confirm it always pays to to keep checking the market for when you need to switch energy supplier. Switching energy suppliers regularly to ensure you’re on the best deal can save you a small fortune on your energy bills. But switching has its limits, that’s why we created Flipper.

 

About Flipper

When you switch energy supplier, you have to do the legwork. You have to compare prices (you could use price comparison websites, but you’re not guaranteed to find the best deal), choose a tariff, fill out paperwork and the rest.

We’re the first automatic energy switching company. Only, we call it ‘flipping’ - here’s why.

Flipping removes the hassle from switching energy providers by continuously checking the market for the best deal and automatically flipping you to the cheapest tariff.

Since 2016 we’ve saved our members millions by flipping them to the best energy deal. The average yearly saving for one member is £385. And we’re honest about our savings figure. We charge our members a small annual fee of £25, which we only charge if we find you a saving of more than £50.

The Ofgem energy price cap is a good idea, but it doesn’t help everyone - only those on poor value rates, those who stay loyal, those who are too lazy, or those who think it's a hassle to do so. The supplier's capped standard tariff is not the best deal out there, so why see how much you can save by switching to the cheapest supplier.

Try it for yourself with Flipper, The easiest, fairest and fastest way to save money on your gas and electricity bills.

And remember, as Ofgem themselves say "Even greater savings are to be had if you switch."

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