Our Guide to the New Energy Price Cap
In October 2021, the UK saw a new energy price cap instituted by the Office of Gas and Electricity Markets (Ofgem), which established a maximum amount that energy suppliers may charge for units of gas and electricity. This cap only applies to domestic customers, but because utilities are such a large part of the average family’s budget, this change could make a significant impact. Because of this, consumers are left with questions about how they can use the energy price cap to their advantage.
How do energy price caps work?
The energy price cap is a maximum limit on the amount that gas and electric suppliers can charge per each unit used and includes a maximum daily charge simply for being in a home attached to the grid. However, there is no maximum limit to the amount that you will pay overall – your bill amount is still dependent on your usage.
Why is it changing now?
Ofgem assesses the limits of the cap about twice a year to ensure that they are consistent with wholesale energy costs. Often, this happens seasonally in summer or winter. Because the price cap alterations for April 2022 have not been announced yet, experts are left to make educated guesses about what will change. Considering the trends of recent years, many experts assume that the cap will rise from the current rate of £1309 (depending on location) by upwards of 50%. This may be, in part, because of the energy crisis that has skyrocketed wholesale prices.
How do I know if I qualify?
Often, the price cap applies to energy contracts that you did not explicitly choose to have. For example, if you have never switched your energy tariff and are on your supplier’s standard contract, you will likely be protected by the price cap. However, if you are set up with a fixed-term contract deal that you chose, this cap will likely not affect what you pay at all. A good rule of thumb is that if you have switched plans in the past year, you are often not covered by the energy price cap, but it is always a good idea to check with your supplier to make sure.
Is the price cap always the best option?
Many experts recommend sticking with the cap, as it will likely always be the cheapest option. The point of the price cap is to ensure fair pricing for consumers, so lower rates make sense. However, there are usually worldwide and personal circumstances that could affect your ideal decision.
For example, if you were to shop around and find a cheaper deal, but you don’t have the credit score to be approved, or would have to change your usage habits, it may not be worth it. Additionally, wholesale energy costs are constantly fluctuating, but the cap is only assessed twice a year, meaning that there could be times that it appears cheaper to switch to a fixed deal. At the end of the day, everyone has different circumstances, so consider speaking to a trusted financial adviser to better understand what choices are best for you and your family.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
gpfm are an independent financial planning company dedicated to the provision of personal, professional, and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.