What does energy price cap mean?


The energy price cap is the maximum amount a utility company can charge an average UK customer per year for the amount of electricity and gas they use, preventing companies from simply passing on cost increases to the consumer.

However, the cap, set by regulator Ofgem and first introduced in January 2019, only applies to customers who have a standard variable tariff, typically a provider’s default and most expensive option.

It doesn’t protect consumers from global market fluctuations and doesn’t constrain an individual’s overall bill – if you use more than the “average user”, you’ll still pay more.

The rate is reviewed every six months, and the last cap, announced on February 3, 2022, resulted in a 54 percent increase, marking a steep rise in household bills this spring.

From April 1st, the average household cap will increase from £1,277 to £1,971. That’s an increase of £693 per year for the average customer.

Prepaid meter customers will see a £708 increase from £1,309 to £2,017.

Jonathan Brearley, chief executive of energy regulator Ofgem, said: “We know this surge will be extremely worrying for many people, particularly those struggling to make ends meet, and Ofgem will ensure that energy companies keep their customers up to date support in any way we can.”

The latest review on 6 August 2021 was itself a rise of 12 per cent or £139 from six months earlier, but this latest development spells more bad news for the consumer when the cost of living is already skyrocketing and inflation is expected to be higher than current levels Status will rise from 5.4 percent to over 7 percent.

The Independent‘s James Moore has likened the prospect of higher bills to “an arctic wind blowing through people’s personal finances”.

Russia’s disastrous war in Ukraine has only exacerbated tensions in Britain and elsewhere, as the aggressor is a key energy supplier to continental Europe.

In response to rising domestic bills, Chancellor Rishi Sunak has since announced £150 council tax rebates will be given to homes in Bands A to D and will unveil plans to offer a £200 rebate on bills.

A government-backed loan scheme of this magnitude will cost around £5-6 billion, well below the £20 billion demanded by the energy industry, which has already criticized the announcements.

Dale Vince, the boss of Ecotricity, already called the measures “far too little, far too late”.

Labor Shadow Chancellor Rachel Reeves also called Mr Sunak’s plans in the House of Commons a “buy now, pay later scheme that will drive up tomorrow’s costs”.

Ahead of Christmas, suppliers had urged Business Secretary Kwasi Kwarteng to agree to a range of measures, from tax cuts to direct government financial intervention, to protect customers from unaffordable increases that are adding to the already skyrocketing cost of living.

Energy UK, the trade association for UK suppliers, has called for a reduction in VAT on household bills from 5 per cent to zero and an industry-wide financing scheme that allows its companies to spread the cost of gas price spikes over several years.

But in the October budget, Mr Sunak defied calls to cut the energy tax, with Whitehall sources saying at the time such a move would be ill-targeted to help people who could afford to pay more, as well as those who who will really fight.

Vendors like E.On also called for removing environmental taxes that fund renewable energy and energy efficiency upgrades from bills, arguing that it would be the more progressive approach because those with higher incomes would contribute proportionally more, although it’s an unwelcome setback would represent for the environment.

The same company’s CEO, Michael Lewis, went even further, imploring the government to be “radical” in using public money to bail out customers in the short term.

“Bills are rising so much that there is a wholesale price risk that is affecting the whole economy and that needs to be led by Government where we can come up with ideas,” Emma Pinchbeck, chief executive of Energy UK, told BBC Radio 4 today program as utility chiefs met with ministers in Westminster in early January to avoid the same fate as the 28 companies that went bust over the looming crisis in 2021.

Speaking of the impending pressure on household finances on his ITV show in January, the ever-imaginative money-saving expert Martin Lewis had to admit for once that he was baffled by the prospect of tackling such a dramatic rise in electricity bills, saying, He said he left “trembling” and “close to tears” with frustration at not being able to help a single mother who couldn’t pay her bills.

“There are a lot of people out there who can afford the increase and won’t like it, but there are also millions of people who will plunge into energy poverty, who will be about to have a choice between heating and eating,” says he warned his audience.

As Ofgem himself has done, Mr Lewis advised his viewers to speak to their supplier about potential payment plans and suggested households check if they are eligible for the government’s Warm Home Discount or winter fuel payment.

Given that the cheapest energy tariffs on offer are typically around £200 below the energy cap, the usual recommendation is to switch suppliers regularly to ensure you get the best deal and keep the current low price for at least 12 months to back up.

But the current state of uncertainty is such that even this conventional wisdom is being called into question.

“Under normal circumstances, switching is a good way to break the price cap and save money. However, due to the current unprecedented conditions in the energy market, we are changing the habit of their lives and are advising our customers that switching may not be the right thing to do at this time,” price comparison site Moneysupermarket has advised its users.

Mr Lewis was broadly in agreement, telling subscribers to his weekly email: “It looks like most people shouldn’t do anything (no certainty, I don’t have a crystal ball), it looks like only a few edge cases should pay attention to fix the same. So when in doubt, just stick with today’s cheapest price – that’s the upper limit.” What does energy price cap mean?

Bobby Allyn

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