April's Energy Price Cap Explained

Ofgem current reviews the energy price cap twice a year, during the summer and the winter. The summer cap is usually announced in February and the price cap is applicable from the 1st of April. The winter cap is announced in August and the energy price cap is applicable from 1st October.

The main reasons for the energy price cap changes are because of the costs energy suppliers face for providing energy though there are many other reasons the affect the cap.

Ofgem is considering reviewing the cap more frequently and is currently consulting on whether it will begin updating the cap more often. In addition to this, Ofgem also can change the cap at any time in to “exceptional circumstances”.

Prices have skyrocketed over the last year with many factors influencing this. Russia is a major international energy supplier and due to the devastating invasion of Ukraine by Russia has seen wholesale gas prices spike to almost three times what they were at the beginning of the year. Find out more about the effect the Russian invasion has had on the energy market here.

The price cap protects default tariffs, whether you are paying by direct debit, cash, cheque, or prepayment. These tariffs are commonly known as standard variable tariffs (SVT’s) and you will be on this tariff if:

• You have never switched your tariff. You would have always been on your supplier’s standard tariff, so you will be protected by the cap.
• You were on a fixed tariff but haven’t chosen to switch again. If you have previously chosen a fixed deal, once the fix period ends you will be automatically rolled on to a price-capped tariff if you do nothing.
• You were with a supplier that has gone bust. In most cases, if your supplier has gone bust (as more than 28 firms have in recent months), your existing tariff with that supplier will end, and Ofgem will pick a new supplier to take over. Your new tariff with the new supplier will be protected by the cap.
• You’re moving home. Usually when you move home, your current tariff will end when you let your supplier know you’re moving out (a few do let you transfer fixed deals, so do check).

If this is the case, you will need to contract the supplier of the property you are moving into and let them know you have moved it and set up a new account. Your supplier will then place you on a default tariff from the date you moved in, which will be protected by the price cap.

The simple answer is yes, the price cap is different depending on how you pay for your energy.

If you pay by direct debit, until 31 March the cap is an average £1,277/year on typical use. This is the lowest, as direct debit is cheaper for energy companies.

If you pay by cash, cheque or quarterly direct debit, the cap is £1,370/year on typical use. Ofgem says this is higher to reflect the additional costs from energy firms to bill those that don’t pay by monthly direct debit.

If you have a prepayment meter, the cap is £1,309/year. Ofgem says it costs more to bill customers with prepayment meters, compared to those paying by direct debit.

The energy default tariff price cap is dependent on a variety of costs energy suppliers face. The biggest cost is wholesale prices, the prices suppliers pay for gas and electricity. This accounts for about 41% of an energy bill for a tariff priced at the highest allowed under the current cap.

It is also what causes most of the change to the cap every six months, as wholesale prices are constantly fluctuating. Other factors, include the maintenance costs for the pipes and wires that provide the gas and electricity. As well as operating costs that suppliers face for billing customers and supplying energy metering services. Find out more below:

Ofgem can add on any unexpected costs to the price cap

There is also what’s known as an ‘adjustment allowance’, which allows Ofgem to add unexpected costs into the price – for example, Ofgem will add the costs resulting from all of the suppliers that have failed in recent months to the next cap from April. About £68 of the typical £1,971/year bill under the new cap is for supplier failures.

Other costs include network, operating and policy costs. Other than wholesale energy costs and the special adjustment allowances, the price cap is also made up of the following:

• Operating costs

This covers the cost of billing and metering services, including the cost of the smart meter rollout. It accounts for about 16% of the current cap on typical use.

• Network costs

This is the costs suppliers face for building, maintaining, and operating the pipes and wires that carry energy to households. It accounts for about 21% of typical energy bills under the current cap.

• Payment method allowance

This is to cover the cost of taking monthly direct debits, billing people quarterly by cash, cheque or direct debit, or billing by prepayment. Although this is depending on the payment method – for those on the monthly direct debit cap, it is just 1%. For those paying by quarterly direct debit, cash, or cheque, it is 7%.

• Policy costs

This is to support Government environmental and social schemes to help households save energy, to reduce emissions and to encourage homes to get solar panels and similar renewable energy tech. It accounts for about 13% of a typical bill under the current cap.

VAT. For energy, this is set at 5%, which is added to the price of all tariff rates. This is about 5% of a typical bill.

Earnings. This is the part of the bill that is profit for a supplier – Ofgem says it allows for a ‘fair rate of return’ for suppliers. It accounts for 2% of a typical energy bill under the cap.

Other costs. There are a few other small costs Ofgem accounts for, such as what is known as a ‘headroom allowance’, which is supposed to help with any unexpected costs.

When the cap was first introduced it was set to remain in place until the end of 2020, although the Government can extend it annually until 2023 at the latest. The Government has since said that they will allow the cap to be extended beyond 2023 if needed.

If you did not submit a meter metering before 31st April 2022, your supplier may estimate your energy usage which could result in your energy bills being more expensive.

If you have a smart meter, your meter readings will automatically be sent to your supplier, meaning your bill will be accurate.

If you are on a flexible tariff the price cap will affect you but if you are on a fixed tariff, your contract will protect you against price rises for the length of your contract. If you are on a fixed energy tariff, your unit charge will not change. This means that Aprils price increase will not have an immediate effect on your contract.

Previously, the cap has been much cheaper than a fixed tariff, but this will change after April’s price increase. A new price cap will be introduced on 1st October 2022 and will be based on the recent wholesale costs.

It may be worth securing a fixed contract to protect yourself against steep price rises, especially if you value price certainty.

This is a mix of art and science, so you need to be aware of some of the other assumptions we have had to use:

• Ofgem’s price cap methodology does not change (but they are consulting on it).
• Nor does the Government change the energy market structure of levies on firms.

Following the April cap, the next price cap announcement will be announced in August and will come into effect on 1st October. The next price cap may increase by 25% to £2,500 a year and some analyses have even suggested £3,000 or more.

Fuel poverty is expected to affect millions of people and there are many government grants to help support households. This is coupled with the crippling rising bills of other household essentials such as mortgage repayments, petrol, and groceries.

If you are finding it hard to pay your energy bills, there is help available wherever you are in the UK. Find more information about what to do if you can’t pay your energy bills.