Everything you ever needed to know about the Energy Price Cap, but were afraid to ask
By Sustainable Silchester’s Energy Expert
This week Ofgem, the energy regulator, announced the headline figure for the energy price cap would rise by around 80% to £3,549 per year. Given the amount of ill informed comment in the press and social media, I thought it was worth writing a short blog about what the energy price cap actually is and what it means for you as a domestic consumer (nothing written here is aimed at business use).
A Brief History of the Price Cap
The price cap was introduced in January 2019 with the purpose of ensuring that bill payers who, for whatever reason don’t seek out a cheap price for their gas and electricity, wouldn’t be too badly disadvantaged by unscrupulous energy companies. In other words, it seeks to reduce the cost of loyalty. The cap sets maximum prices for the standard variable rate that bill payers or moved to if they do not opt for an alternative deal. The expectation was that most competitive energy rates would be set well below the standard variable rate. The price cap was never designed to protect us from the impact of soaring energy prices. Indeed, there is some evidence that the question of what happens if energy prices rise above the price cap was not fully considered when developing this policy.
Roll on three years and we have seen the unintended consequences of this policy. Over 60 suppliers have gone bust leaving less than 40 remaining. The standard variable rate is now the cheapest energy price most people can access. And the price of energy is becoming unaffordable for the much of the population. The price cap will not solve the cost of energy crisis, but it is still worth understanding what it means in practice.
So a price cap of £3,549 means I won’t pay more than this for my energy?
I’m afraid not. The £3,549 figure is based on an average house (3 bedrooms, semi-detached) and an average family (2 adults 2 children) using gas central heating. We pay for our electricity and gas in units of kilowatt hours (or kWh). A kilowatt hour is a measure of energy, broadly equivalent to boiling a kettle for 20 minutes, leaving an LED light bulb on for a week or one tenth of a litre of petrol. Ofgem’s average home uses 2,900kWh of electricity and 12,000kWh of gas each year and this is used to calculate the headline figure. If you use more than this average amount you could end up paying substantially more than £3,549. If you use less energy you will pay less. Furthermore, it assumes you pay by direct debit, if you chose to pay by cash or cheque it could be up to £215 higher while a pre-payment meter may cost an additional £59.
If I’m not paying £3,549 what am I going to pay?
Alongside the headline figure, Ofgem also publishes actual energy rates for each area of the country. These are divided into a standing charge (price per day) to pay for the costs of being connected to the gas or electricity grid and a price per unit of energy used. For Silchester in the Southern electricity region our rates are:
| Gas | Electricity | |
|---|---|---|
| Energy Price | 14.88p / kWh | 52.07p / kWh |
| Standing Charge | 28.49p / day | 44.41p / day |
So if you can find how many units of gas and electricity you used last year from your previous bills you can calculate your expected costs for this year. For a standard variable rate, gas and electricity customer paying by direct debit this would be around £266 + 0.15 x [your annual gas usage in kWh] + 0.52 x [your annual electricity usage in kWh].
Does the price cap mean my energy bill is going to go up?
Not necessarily – many people are not on the standard variable rate, having chosen instead to fix their tariff for a period of months or years at an agreed rate. These rates are fixed for the duration of the contract and unaffected by the price cap. Some energy companies are still offering fixed tariffs but they all tend to be significantly higher than the standard variable rate. Still if you expect rates to go up further (as most commentators do) this might be a sensible option to protect yourself from future rises.
I pay the same amount each month – how is this going to change?
Most energy companies now bill a fixed amount every month based on a projection of what you are likely to pay over the course of a year. This means in the summer you pay more than the energy you actually use and in winter you pay less. Over the course of 12 months it should even out.
Energy companies have been criticised for significantly over estimating these monthly payments leading to people building up a substantial surplus – or (to put it another way) lending money free of charge to the energy companies. A change to the price cap provides an opportunity for energy companies to increase the amount they collect and you should be careful this increase is reasonable. Divide the amount you expect to pay over the next year (see above) by 12, and if this is not close to what your energy company is proposing as a monthly rate you can challenge them and ask for it to be reduced. If you have any difficulty with this, then Citizens Advice Tadley can help.
Are we all doomed?
Few of us can easily afford energy bills of the level indicated by the price cap. Whilst the government is likely to provide more short term help over the winter, the fact remains global energy prices have risen massively and any reduction in bills is going to have to be paid for somehow, somewhen and by someone.
However, there is a lot that we can do to reduce our own energy bills. Sustainable Silchester has plenty of advice on the topic, see Home Energy.
An electrical device drawing only 1W left on all the time now costs £4.50 per year. As fridges get older, the refrigerant leaks out, and they have to work harder to keep cool. An old fridge might be costing you £450 extra every year, an you wouldn’t know that there is anything wrong with it.
If you have a working smartmeter, now is the time to go round the house and check what is being left on, and how much energy it uses. If you don’t have a smartmeter, Sustainable Silchester has a clip on meter that Silchester residents can borrow for a week to investigate. Aim to get your baseload as low as possible – the average is about 150W, but below 100W should be achievable.