WHAT THE ENERGY PRICE CAP CHANGE MEANS FOR ENERGY BILLS

Friday September 8, 2023

The Energy Price Cap: Keeping a Lid on Your Energy Costs

The Energy Price Cap serves as a safeguard, limiting the maximum amount energy suppliers can charge for each unit of energy consumed by households. This cap undergoes adjustments every three months under the purview of the energy regulator Ofgem. These periodic revisions are intended to ensure that the pricing structure remains aligned with fluctuations in underlying energy expenses and inflation rates.

Recent Reductions in the Energy Price Cap

Starting from July through September, the Energy Price Cap witnessed a reduction, thereby constraining the average bill for a typical household that uses both gas and electricity and opts for direct debit payments. This reduction brought the average annual bill down to £2,074 or approximately £173 per month. Subsequently, with further declines in wholesale energy prices, Ofgem has recently announced another reduction, slated for October to December, slashing the cap by roughly 7% to £1,923 per year, or about £160 per month.

Variability Based on Household Characteristics

However, it’s essential to recognize that the quoted figures represent the average expenses for a ‘typical’ household. Ofgem characterizes a ‘medium-use household’ as one inhabiting a 2-3 bedroom house with 2 or 3 residents. The actual amount you pay for energy hinges on several factors, including your consumption, geographical location, and your chosen method of payment.

A Higher Cap, Yet Volatile Market Conditions

It’s worth noting that the current Energy Price Cap, though reduced, remains significantly higher than pre-2021 energy bills. Ofgem acknowledges the continued volatility in the energy market, which can impact future pricing.

Understanding the Energy Price Cap vs. Energy Price Guarantee

In response to escalating wholesale energy costs, the government introduced the Energy Price Cap in 2019, establishing a maximum price for energy suppliers. Since October 2022, an additional measure known as the Energy Price Guarantee (EPG) has been in place. The EPG limits the annual energy bill for a typical household using gas and electricity (paying via direct debit) to £2,500, superseding the Energy Price Cap when necessary.

Changes in Energy Bill Discounts

From October 2022 to March this year, all households enjoyed a £400 discount on their energy bills under the government’s Energy Bills Support Scheme. This translated to a £66 credit on electricity bills in October and November, followed by £67 in December, January, February, and March. However, this scheme has concluded, and any future reductions will depend on government initiatives.

Is the Energy Price Cap Relevant to You?

If you are on a fixed tariff for your energy supply, the Energy Price Cap does not affect you. It applies exclusively to default energy or standard variable tariffs, which encompass direct debit, standard credit, prepayment meter, and Economy 7 (E7) meter users.

Changes in Discount for Prepayment Meter Users

For those with pre-payment meters, the Energy Price Guarantee (EPG) has been designed to align costs more closely with direct debit users. As of October 1, 2023, a change in how the discount is applied will shift it from unit rates to the standing charge.

Direct Debit Users: Verify Your Bill Accuracy

If you pay via direct debit, your energy bills are typically estimated based on usage. If you find yourself in credit, it’s advisable to conduct a meter reading and contact your supplier to ensure you’re paying the correct amount.

Estimating the Impact on Your Energy Bills

The Energy Price Cap, set at £1,923 per year or approximately £160 per month from October to December, serves as an estimate for a typical ‘medium-use household.’ It doesn’t impose a cap on your total bill but rather limits what suppliers can charge per unit of energy consumed.

Factors Affecting Your Energy Costs

The amount you’ll pay also depends on factors such as your home’s energy efficiency, your choice of appliances, and their usage. Energy usage is measured in kilowatt-hours (kWh) or units, with one kWh capable of powering a 100-watt lightbulb for 10 hours.

Standing Charges: Fixed Costs

The fixed standing charge, incurred to maintain your connection regardless of usage, varies by supplier, tariff, and location. The average daily standing charge is approximately 53p for electricity and 30p for gas, equating to over £300 annually on average.

Future Energy Cost Projections

The Energy Price Cap undergoes adjustments every quarter, in January, April, July, and October. According to analysts at Cornwall Insight, an independent energy research firm, energy costs are anticipated to rise again starting in January 2024, with an estimated increase of 6% to £2,033 for the first quarter. Subsequent quarters are projected to see reductions to £1,964 (-3%) from April to June 2024, and £1,917 (-2%) from July to September 2024.

Government Support for Energy Bills

Various government-funded schemes in England, Scotland, and Wales aim to provide assistance with energy bills. For Northern Ireland residents, specific information can be found through the provided link. One such scheme, the Warm Home Discount Scheme, offers help during the winter months. Eligible individuals receiving benefits or the Guarantee Credit element of Pension Credit, and their partners, may qualify for a discount of £150 off their winter electricity bill or have £150 added to their prepayment meter. This scheme reopens in October 2023, with further details forthcoming.