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Energy Price Cap: Its Meaning and Purpose

The UK’s energy regulator Office of Gas and Electricity Markets (Ofgem) have recently introduced the Energy Price Cap to make sure that customers pay a fair price for the energy they consume by limiting the price that suppliers charge per unit of energy. According to Ofgem, they calculate energy suppliers’ need to spend in order to distribute their energy into customers’ homes and small establishments.

The energy price gap is reviewed and set by Ofgem every six months

Its purpose is to protect consumers from being overcharged, primarily those who are on expensive default and prepayment tariffs.

Customers who are on prepayment meter or standard variable/default tariffs are set with an Energy Cap. These types of tariffs are generally the most expensive ones that providers offer. That being said, customers that are on a fixed-term energy tariff will not have their energy prices protected by the caps; Fixed rate tariffs are often cheaper.

The price cap won’t necessarily limit your total energy bill. It will vary depending on how much energy is being consumed.

How much is the Energy Price Cap?

Currently, Ofgem has cut the Prepayment Meter Cap £17 to £1,200 annually, while the cap for Default Tariffs are at £17 to £1,162 per year.

The energy price cap can change depending on your location, tariff, and meter; you could either be capped higher or lower. Ofgem sets the energy price cap based on wholesale cost of energy, operating costs, policy costs, prepayment meter costs, network costs, and other number of factors as they commit to set a fair price cap to energy customers nationwide. 

Price caps are made to limit the amount that suppliers can charge their customers per kWh consumed: 

  • Unit charge per kWh for electricity-only customers paying by direct debit: 17p
  • Unit charge per kWh for gas-only customers paying by direct debit: 4p
  • Annual standing charges for electricity-only customers: £83
  • Annual standing charges for gas-only customers: £94
  • Annual standing charges for dual fuel customers: £177

UPDATE (August 2020):

Ofgem has announced their latest price cap on August 7th, 2020. The energy regulator cut the default price cap to its lowest level of £1,042 since it was introduced in January 2019. The reduction was caused by an overwhelming decrease in the wholesale energy costs, giving annual bills a fall for many consumers UK-wide. 

According to the energy watchdog, these changes will lead to ‘big savings’ for 11 million energy consumers that are on default tariffs, and over four million consumers on prepayment meters.

Who benefits from the energy price cap?

Consumers that are on default variable or standard variable tariffs will mainly benefit from the energy price cap. This is due to the fact that they already pay the highest rates for energy based on their current tariffs.

Poor value energy tariffs can be a root of two things: lack of knowledge or being unknowingly rolled over onto a much more expensive contract.

Consumers that are on fixed-rate tariffs won’t be affected by the energy price cap, mainly because fixed-rate tariffs are normally cheaper compared to the former.

What are the disadvantages of energy price cap?

Not everyone on an expensive rate/tariff will be aided by the energy price cap – Unfortunately, consumers that are on standard variable rate tariffs will only be affected by the price cap, meaning any consumer on an expensive fixed-rate deal/tariff won’t benefit from this at all. A key to finding the best deals on a fixed-rate tariff is by taking the time to compare business energy quotes by yourself or, even better, by seeking assistance from a comparison site such as BetterBusinessQuotes.

Energy consumers can be discouraged to make the switch – Ironically, the energy price cap⁠—despite its goal to protect consumers from ‘rip-off’ energy prices⁠—can actually give customers less security; it also acts as a barrier to its ‘main goal’which is to help people save money on energy. The reason being that energy consumers will think that they are on a good deal when they’re oblivious to the fact that they could actually save thousands of pounds more by switching to a different energy supplier. 

How will prepayment customers be affected by the cap?

Also known as a safeguard tariff, customers on prepayment tariffs will be affected the same way as those on standard variable tariffs. 

Prepayment tariffs have a separate cap which is reviewed by Ofgem. 

The cap currently applies if a customer pays for their gas and/or electricity in advance by using a prepayment meter (or also through a token-operated meter). 

Will I be able to save money with the price cap? If yes, how much?

Customers who have maintained their level of energy use were able to save roughly between  £75 and £100 a year on their utility bills ever since the energy price cap was introduced, according to Ofgem.

Remember, price caps won’t limit your total bill. It will still vary depending on the amount of energy you consume. 

While the energy price cap is designed to help consumers save money on energy, you might actually be able to save much MORE by switching to a new tariff. BetterBusinessQuotes has helped hundreds of business energy consumers find the best tariff deals that work just for them and their requirements. 

Use our free business energy comparison tool by filling in the form and find the best deal that works for you!

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