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You may have heard the term energy price cap in the news or in conversations with energy companies. But do you actually understand what it means, how it works or who benefits from it? In this article, we explain this often touted phrase and answer some of the most commonly asked questions about this key piece of energy legislation.
What’s the point of energy price caps?
Energy price caps are designed to protect domestic energy consumers from overpaying for their gas and electricity. Caps are set by the industry regulator Ofgem to ensure that households pay as fair a price as possible for their energy consumption. The cap effectively limits the amount energy companies can charge you for each unit of gas and electricity you use. The unit used to measure energy is the kilowatt hour (kWh) and you should be able to see the amount you are charged per kWh on your gas and electricity bills.
How does the energy price cap work?
It is important to note that energy price caps only affect you if one of the following applies:
- you use a prepayment meter
- you are on a default tariff (one you haven’t chosen)
- you are on a standard variable tariff.
Default and standard variable tariffs tend to be expensive so if you are on one of these contracts, it might be a good idea to compare rates and suppliers to see if you can get a better deal.
It is also important to understand that there is no cap on your overall bill, which will obviously be affected by how much energy you consume. This means that it’s still a case of if you use more, you will have to pay more. As we’ve already mentioned, the cap is only placed on each unit of energy you consume.
Prepayment price caps vs default price caps
There are two types of energy price caps: prepayment price caps and default price caps. So how does the energy cap work in each of these cases? Let’s take a look.
Prepayment price caps
Also known as safeguard tariffs, prepayment price caps apply to customers who use prepayment meters to pay for their gas and electricity. The cap was introduced in April 2017 to make it fairer for prepayment customers, who have fewer options and pay more than customers who can pay by direct debit or credit.
How is the prepayment energy price cap set?
The cap Ofgem sets on prepayment contracts is based on an estimate of how much it costs to supply gas and electricity to your home. This level is reviewed and reset every six months, in April and in October.
Prepayment price caps vary depending on location. The amount you pay will depend on how costly it is to transport energy to the area you live in.
Who benefits from the prepayment price cap?
At the moment, it only applies if you pay in advance using a token-operated meter. The cap does not apply if you have a smart prepayment meter that continues to operate smartly when you change suppliers.
Do I have to apply for the prepayment price cap?
Consumers do not need to apply for the cap. Rather, it should be applied automatically.
How much is the prepayment price cap set at now?
On 1 October 2020 the prepayment price was set at £1,070 per year. This rate will be in place until April 2021 when it is due to be reviewed and re-set based on the price of supplying gas and electricity for the following six-month period.
Default price caps
Default price caps apply to both standard variable tariff customers and default tariff customers. A default tariff is one that you didn’t choose. You may be on a default tariff if a fixed-rate tariff contract has expired and you haven’t renewed it or switched to a more cost-effective plan.
It’s important to be aware that if you signed up to a renewable energy standard variable tariff, this price cap does not apply to you.
How is the default tariff price cap set?
Ofgem sets the default cap by estimating how much it would reasonably cost for energy companies to supply gas and electricity to customers. Calculations take into a variety of factors, including wholesale gas and electricity costs, the costs of creating and maintaining the energy network (which can cause costs to vary depending on location), costs associated with government energy-saving initiatives, how much it costs suppliers to bill and provide meter services and VAT. Estimates are made with the typical domestic consumer with medium energy use in mind.
Once the cap is set, energy suppliers cannot charge more than this amount. The cap was first introduced on 1 January 2019 and is reviewed every six months.
Who benefits from the default tariff price cap?
According to Ofgem, over half of households in Britain are on default tariffs because they haven’t ever switched to a new contract or haven’t switched recently. It is common knowledge that customers who do not actively seek out better deals in the energy market tend to end up paying more than customers who do.
Default tariffs offer poor value for money. Standard variable tariffs are a common type of default tariff. If you are on a standard variable tariff, your energy bills will fluctuate with market rates. This means that your energy bills could go up unexpectedly and there’s little you can do about it. The default tariff price cap protects consumers on such tariffs from being overcharged for their gas and electricity usage.
However, even with the energy price cap in place, it’s important to understand that you could be paying less for your gas and electricity bills if you were to switch to a fixed-term contract.
Do I have to apply for the default tariff energy price cap?
No, you do not have to do anything. The default energy price cap will be automatically applied to you by your energy company if you are on a standard variable tariff or you have defaulted to a rate you didn’t choose after a fixed-term contract ended.
How much is the prepayment price cap set at now?
From 1 October 2020 to 31 March 2020, the default rate is set at £1,042 per year. For exact details of how your unit rate is capped, it’s best to speak to your energy provider.
How long will the energy price caps last?
The prepayment price cap was due to end at the end of 2020. However, Ofgem took the decision to roll this cap into the default cap to make sure that people with prepayment meters stay protected from overcharging. The prepayment price cap will stay in place as long as the default cap exists.
According to Ofgem, the default price cap is due to expire by 2023. However, it’s thought that other measures, such as speedier switching times and smart meters, will help customers to access affordable energy deals more easily.
While Ofgem sets the caps and monitors the market, it is up to the government to review Ofgem’s reports and, ultimately, decide whether or not the market is working effectively enough for price caps to be taken away.
Do energy price caps prevent suppliers from increasing the prices of their other tariffs?
No. Energy suppliers are free to raise the prices of fixed-term and other tariffs. However, Ofgem works to ensure fairness and competitiveness in the energy market and you shouldn’t struggle to find plenty of cost-effective gas and electricity deals.
Here at Utility Bidder, we recommend that all customers shop around when buying gas and electricity. While energy price caps protection against being overcharged for your energy, you could still be paying more than you need to if you’re on a standard variable or default tariff.
Start paying less
Whether or not you’re currently on a capped price tariff, we can help you to find the most competitive deal on the market for you. We can save you time and money by comparing exclusive rates from more than 27 suppliers to help you to easily identify the best option for you. Every year we help thousands of domestic energy customers just like you to switch to more affordable gas and electricity plans.
Why not call one of our friendly advisors on 0800 007 4001 or fill out our contact form to find out how we could save you money? We would be delighted to help you.
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