An energy bill cap of £1,136 a year for “typical usage” has been planned by Ofgem to give consumers a fairer deal. The figure is based on a standard dual fuel customer that pays direct debit and will give energy providers no choice but to cut excess charges for those on poor value default deals.
Why is the energy price cap needed?
On 19 July, The Domestic Gas and Electricity (Tariff Cap) Act became law and gave Ofgem power to introduce the cap in a bid to help consumers who suffer with increasing costs from the “Big Six” energy companies.
The plan will be confirmed in November and is set to take place towards the end of December until 2023. Gas and electricity providers will be made to reduce their prices to the same level or below the cap. That way, households will be safeguarded from being overcharged for their gas and electricity usage.
Who’s going to benefit?
The cap is said to benefit 11 million households on default tariffs – those who have never opted to switch tariffs or haven’t swapped recently. When a fixed-term contract ends and no action is taken, the consumer is automatically put on a costlier deal.
What are the savings?
Those who are on a standard tariff and purchase their gas and electricity from the same provider are thought to save around £75 each year. Consumers who are on a more expensive deal would save around £120. These figures are based on a British Gas customer who would save around £69, whereas a Scottish Power customer would save an average of £121.
I’m already on a capped tariff, do the new regulations affect me?
Last April, Ofgem introduced a price cap for consumers on prepaid tariffs. This is separate to the cap on standard tariffs, so you will not be affected at present. Ofgem has recently claimed that it will be increasing the level of the prepay cap so increased bills could be on the horizon.
It may not be all it seems
Energy Expert, Stephen Murray at MoneySuperMarket, cautioned customers to be wary: “There are more than 100 tariffs available right now which are cheaper than the proposed level of the cap price at £1,136. That means switching today could save you £250 or more, and there’s no need to wait for a price cap that would actually save on average £75.”
Another expert warns that there’s huge concern that the introduction of a cap will give people false hope that doing nothing is fine.
Martin Lewis, Founder of MoneySavingExpert.com, said: “Ofgem has been brave setting the price cap lower than expected. It will mean millions see a noticeable reduction in bills. Yet the regulator was given a poisoned chalice. It is calling this new tariff a ‘fair’ tariff, but that isn’t the same as a good tariff. The savings are still pitiful compared to the amount people would get if they switched and went to the market’s cheapest providers – yet there is a real concern the imposition of a cap will give people a false sense of security that doing nothing is fine.
“In fact, the problem with this price cap is it is a bastardisation of the current market model – which is meant to be about competition. To make that work, and encourage switching, you need big differentials, some will have to pay more than others. The alternative is price regulation, where we simply tell companies what they can charge. We need to pick one and work with it. This is a halfway house between the two, a hodgepodge.
“Already in the run up to the price cap we’ve seen prices concertina – diminishing choice and savings for those who do switch. Two years ago, four of the big six firms offered fixed tariffs less than 10% more expensive than the markets cheapest. Now even the best from the big six is nearly 20% more.
“If we are to stick with a competitive market, a blanket price cap is an indiscriminate solution. Instead we need to decide who is and who isn’t an acceptable victim of it. If I – as someone who is web-savvy, affluent and financially informed – chooses not to switch, that’s my problem. If a struggling 90-year-old granny who’s not on the web is too scared to switch, it needs fixing.”
The round up
So while it may initially seem like “Christmas has come early” (Stephen Murray), the importance of shopping around before your standard tariff ends still outweighs the benefits of the soon to be energy cap. That way, you can decide on a new tariff (if more suitable) and be confident you’re not overpaying.
Energy UK’s Chief Executive Lawrence Slade says: “Energy efficiency is the most effective way to help customers save money on their energy bills for the long term”.
To find out more how you can cut energy costs, read our blog 6 Energy Saving Hacks That Will Save Your Business Big Money. You can implement the same methods when at home!