If you’re on a standard energy tariff, the energy price cap will probably apply to your charges. Find out what it means for your bills and how you could shop around to get a better deal.
It’s the maximum price energy suppliers can charge customers - both for the standing charge and the price of each kWh of electricity and gas (also known as the unit rate).
The cap is set by the independent energy regulator Ofgem twice a year - in winter (February) and in summer (August), with changes coming into effect every April and October.
It applies only if you’re on a default energy tariff, often called a standard tariff or ‘standard variable tariff’ (SVT).
The price cap doesn’t apply if you’re on a fixed-term energy tariff or a standard variable green energy tariff that Ofgem has exempted from the cap.
The level the price cap is set at is based on what it costs companies to supply you with energy.
Mostly, that includes taking into account the market conditions in the wholesale energy market and what it costs suppliers to buy international oil and gas. If wholesale energy prices go down, the cap is lowered. But if they go up, the price cap is raised.
When Ofgem sets the cap it also takes into account network costs to build and run the pipes and wires to transport energy to you. These vary by region so there are different price caps for different areas.
The way you pay and the type of energy meter you have will also have a bearing on what your supplier charges you to meet the cap.
Suppliers can charge less than the set level of the cap, but not more.
The price cap doesn’t cap the total cost of your bill - the amount you pay also depends on how much gas or electricity you use.
It was brought in to protect consumers from unfair pricing and ensures that suppliers pass on only legitimate price rises as well as any drops in their costs to their customers.
In a similar way, it protects suppliers. A rise in the cap to reflect higher wholesale energy and supply prices allows suppliers to recover these costs.
There’s a separate cap for people on prepayment tariffs. It works in the same way as the default tariff price cap but is set at a different level.
The energy price cap applies only if you’re on a default energy tariff (often called a basic tariff or ‘standard variable tariff’). This means that, depending on the costs of wholesale energy, your bills on this tariff can go up or down.
Some people on these tariffs mistakenly think that the price cap can protect them from rising costs in wholesale gas and electricity, but this is not the case. The cap is raised when there are hikes in wholesale costs.
A new, increased, cap rate was announced in August 2021 to reflect the rise of over 50% in energy prices over the last six months, with gas prices hitting a record high.
This cap, which takes effect from 1 October, will affect 15 million customers and see bills hiked up to an all-time high. Ofgem says that those on default tariffs paying by direct debit will see an increase of £139 from £1,138 to £1277. Prepayment customers will see an increase of £153 from £1,156 to £1309.
A capped default energy tariff will not be the cheapest deal on the market and you’ll probably be better off switching to a fixed-rate deal.
Fixed-rate deals usually last for 12 months.
Not sure if you’re on a default tariff? Then contact your supplier. Default tariffs can have lots of different names - including ‘standard variable tariff’ (SVT).
You’re likely to be on this tariff if you’ve never switched supplier before or if a fixed-rate deal you’ve been on has come to an end and you haven’t shopped around for a new one. You could also be on a default tariff if you’ve just moved into a new home.
The price hike will come into force on 1 October 2021, so if you want to avoid the increase, it’s worth shopping around for a good value fixed-rate deal - either with your own supplier, or switch to another.