Ofgem Raises the Price Cap Again: How Can I Save?
In the face of the ongoing energy crisis and rising gas prices, Ofgem has announced their most radical rise in the price cap to help combat the fallout for suppliers. Read on to find out why the cap is rising and how you can best beat it.
The energy regulator Ofgem has announced a new revision to the price cap for the beginning of April 2022.
The price cap, which was already raised in October 2021, will rise to an average of £1,971 a year, a 54% increase from where the cap currently sits at £1,277. This increase will primarily impact 22 million customers who are default or standard variable tariffs (SVTs).
This April rise is also expected to be followed by another 12% rise in October 2022 to an estimated level of £2,240.
What Is the Price Cap?
The price cap was a mechanism introduced in 2019 as a means of protecting customers from extreme price hikes by their energy provider. Before 2019, energy suppliers had no upper limit on how high they could raise their variable rates, meaning that a customer who was quoted a low price one month, may be impacted by higher rates the following month. Ofgem created the price cap in order to protect customers from unfair rises.
How Does It Work?
The price cap sets a maximum on how much a supplier can charge customers who are on the standard variable tariff. A standard variable tariff is where the customer does not pay fixed rates over a period of time as companies can raise and lower the price according to market conditions. This can be beneficial for consumers as, like in 2020, those on variable rates enjoyed lower energy costs than those on fixed tariffs.
The price cap sets a limit on how high a standard variable tariff can rise for customers that is quoted using an average yearly cost. This means that a customer’s rates cannot surpass this average. The price cap is reviewed every six months by Ofgem who makes the decision whether to raise or lower it.
The current price cap is set at £1,277 a year.
The price cap is not a bill limit! Although it is quoted as a yearly figure, the price cap does not mean your bill cannot go above the current £1,277 a year. This is only an average calculated from average bills across the country. If you use more energy in a year, you will still pay more on your bill.
Why Is the Price Cap Rising Again?
Many customers will remember that in October 2021, Ofgem raised the price cap for the second time in a year. This was done in order to combat the catastrophic effects of the ongoing energy crisis and the rising gas prices. Despite the rise, it still hasn’t been enough to stop energy companies from going bust, the latest victim being Together Energy in January.
The entire energy crisis has been due to gas prices rising to unprecedented levels.
Why Are Gas Prices Rising?
The rise of wholesale gas prices in international markets has been the main driver for the energy crisis in the UK and Europe. This has been down to a number of combined factors that have wreaked havoc on energy prices. These factors are:
- Colder and longer winter in 2020
- Too little wind in the summer for wind turbines
- Gas storage facilities not refuelled during 2021
- Higher demand for natural gas in Asia
- Political issues over Russia’s Nord Stream 2 pipeline
- Gas-on-gas pricing mechanism
The spike in energy prices has caused the cost of energy to rise astronomically putting pressure on suppliers to manage costs.
How Is This Affecting UK Suppliers?
UK energy suppliers have been hit hard by this surge due to the price cap. Since energy suppliers have been unable to charge their customers more to keep up with costs, many smaller energy suppliers have run into financial difficulties and have had to close.
So far, 28 energy suppliers have collapsed, including big names such as Bulb Energy, People’s Energy, and Avro Energy. Ofgem have been protecting customers from the fallout through their Supplier of Last Resort (SoLR) scheme, where a more solvent supplier is appointed to take on the customers from a failed supplier.
Currently, the whole cost of the crisis has been put on the energy suppliers due to the price cap.
Why was Bulb Energy different? Bulb Energy’s collapse left 1.7 million customers without a supplier. The size of Bulb’s customer base meant it was too big for Ofgem to appoint a SoLR, and the company had to request being placed in a Special Administrative Regime (SAR). This means the Bulb still operates but with state loans and grants.
Check out our article on Bulb Energy’s collapse to find out more.
How Will Price Cap Rise Affect Me?
Although it sounds all doom and gloom, there is a silver lining for energy customers when the price rises in April 2022. Currently no suppliers are taking on new customers because of the price cap and SoLR, however when the price can increase, energy companies will have more manoeuvrability to offer new rates.
As the price cap increases for a second time in October 2022, energy suppliers will be able to offer fixed rate tariffs that can fall below between the April cap and the October cap. This means that customers can secure their rates against further price rises and price cap reform giving them security over their rates.
The government has also announced that it will provide up to £350 per household to help deal with the price hike.
Will There Be Any Government Support?
In reponse to the price cap rise, the government has announced financial aid of up to £350 per household to help deal with the cost of living crisis. This includes:
- A £200 discount off your energy bills this Autumn direct from the government.
- A £150 Council Tax Rebate for households liable for the Council Tax in Bands A-D.
- A £144 million of funding for local authorities to help support those households not eligible for the Council Tax Rebate.
- Flexible adjustment of the price cap outside of the six months
- Price cap adjusted every quarter
- Default fixed tariffs for 6-12 months
The £200 discount will pay back automatically over the course of 5 years starting from the financial year 2023-2024 when wholesale gas prices are due to fall.
There will also be an increase of the Warm Home Discount to £150 from October 2022. The Warm Home Discount increase will be followed by an increase in the eligibility for the scheme.
How Can I Save?
Unfortunately it looks like the days of cheaper energy deals are a thing of the past and customers will have to live with a higher cost of energy for a while. So as we all tighten our belts, here are a few way you can save on your energy costs and improve your energy efficiency:
|Energy Saving Method
|Savings a Year
|Energy saving light bulbs
|Thermostat lower by 1 degree
|One less wash a week
Source: Energy Saving Trust
If you need more ideas on saving energy this winter, check out our Keeping Warm in Winter guide.
What About Prepay Customers?
The price cap affects everyone who is one a variable or default tariff and this includes those customers who use a prepayment meter. The majority of prepayment customers are on variable rates so they are protected by the price cap currently. With the rise in April 2022, prepayment customers will see a rise in their prices too by £708 making it a yearly £2,017.
Our advice for prepayment customers to save money is to either switch to a direct debit tariff to make sure you’re not paying very high standing charges or to install a smart prepay meter to help manage your costs more efficiently.
What Is Ofgem’s Plan for the Price Cap?
Ofgem released their action plan for 2022 before Christmas last year detailing a number of measures for dealing with the ongoing energy crisis. These measures included stress tests, protecting customer balances, and customer acquisition limits. It also included a number of possible price cap reforms to change the way the price cap works.
If you want to read more about all the new measures, consult our article on Ofgem’s New Action Plan.
As it stands, the cost of the crisis has mostly fallen on energy suppliers who have had to deal with the rising wholesale gas prices. Ofgem are trying to work out a way in which some of the cost is shifted from suppliers without hurting customers too much. So far, these are current possible solutions:
A default fixed tariff would mean that instead of a variable tariff that customers could leave without an exit fee, customers would be committed to a 6-12 tariff fixed to the price cap.
So far none of these solutions have been chosen and a Call For Input opened at the beginning of the year for suggestions from the rest of the industry. This Call For Input has now closed.