What is the energy price cap and how does it work?

The government’s price cap on standard rate energy bills comes into effect today

What exactly is the price cap?

It’s a cap on the price that individuals pay for energy if they are on a “standard variable” energy tariff or a tariff they haven’t chosen – known as a “default tariff”. These are the most basic packages offered by energy companies, and tend to apply if you haven’t shopped around for a better deal.

How does the cap work?

Crucially, it won’t cap someone’s total bill – it only limits the price a supplier can charge per kWh of electricity and gas used. It has initially been set at £1,137 a year for a dual-fuel customer who uses a typical amount of gas and electricity and pays by direct debit. Ofgem will update the cap in April and October every year to reflect the latest estimated costs of supplying gas and electricity.

Do I have to apply to benefit?

No – if you are eligible, you don’t need to do anything. Ofgem said the cap would give 11 million customers a fairer deal.

So I’ll definitely save money?

Your bills will fall if you are on a poor-value standard variable or default deal, because suppliers must cut their prices to the level of, or below, the cap. But the amount you pay also depends on how much gas or electricity you use – if you use more energy, your bill will go up.

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Will the cap increase?

Many commentators predict that in February Ofgem will announce an increase in the level of the cap to take effect on 1 April. With wholesale prices having risen significantly in recent months, people on standard and default tariffs could be hit with an increase.

So what’s the best advice?

Citizens Advice said that while people on default tariffs would now pay a fairer price for their energy, “they will still be better off if they shop around”. Comparethemarket.com said that on average, customers who switched paid £921 a year on a dual-fuel fixed tariff – £216 less than the cap level.

Is the cap permanent?

No, it’s due to end by 2023. Ofgem said that by then it expected other reforms and advances, such as faster switching times and smart meters, to bring about easier and fairer access to better deals. “It will be up to the government to consider if the market is working well enough for the cap to be removed,” it added.

Contributor

Rupert Jones

The GuardianTramp

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