The energy price cap is rising - here's what that means for you

The energy price cap is a limit on the price of each unit of energy - not a limit on the overall bill. Credit: Riccardo Annandale via Unplash

Millions of households will see their energy bills rise by more than 50%.

The new price cap, set by energy regulator Ofgem, will come into force in April, adding up to a rise of around £700 for an average household.

People paying default tariffs by direct debit will see an increase of £693 from £1,277 to £1,971 per year, while prepayment customers will see an increase of £708 from £1,309 to £2,017.

The cap is set for six months and could rise further afterwards.

At a glance, this means:

  • A 54% rise from the current price cap of £1,277

  • Government loans will offset £200 of the annual increase, plus a £150 council tax rebate

  • New rate comes in on April 1

  • The £200 discount on energy will be paid back over five years through our bills

  • The net effect is that bills rise by less in the next year, but fall by less in the years to come

  • The plan all depends on the market price of energy falling

Here’s a full breakdown of what this all means for you:

What is an energy price cap?

The price cap is a limit on the maximum amount suppliers can charge for each unit of gas and electricity you use, rather than a price cap on your overall bill.

It’s important to note here the price cap puts a limit on each unit of energy – in other words, the more energy you use, the more you will pay.

The price cap will also apply to the maximum daily standing charge for your home to be connected to the grid.

The cap does not apply to anyone on a fixed-term tariff.

If I'm on a pay-as-you-go tariff, what does this mean for me?

For customers with prepayment meters the price cap will go up by £708 to £2,017.

As noted above, this does mean that this is the maximum anyone will pay - if you use more energy, then it will cost more.

So, why does Ofgem want to change how the price cap works?

Since the start of this year the price that your energy supplier has to pay to buy gas has spiked around fivefold, a lot of this change has happened since September.

Yet what suppliers can charge households is limited by the energy price cap, meaning they cannot pass on these rising costs to you.

Credit: Yue Su via Unsplash

This has meant that businesses are selling gas to their customers at a massive loss, causing more than two dozen to go bust since the start of September.

Ultimately the cost of these failures could run into billions of pounds, money that will eventually be paid by households.

Ofgem wants to make changes to the price cap so that massive price rises will not result in large numbers of failures in the future.

What’s the plan?

Households will be supported by £350 worth of cuts to soften the blow, the government said.

A government loan will mean suppliers will be able to offset the annual increase to energy bills by around £200.

Additionally, Chancellor Rishi Sunak said 80% of all homes in England will benefit from a £150 council tax rebate to help with the cost of energy in April.

Setting out his plans, Mr Sunak told the Commons: “We are going to give people a £150 council tax rebate to help with the cost of energy in April and this discount won’t need to be repaid.

“And I do want to be clear with the House, that we are deliberately not just giving support to people on benefits.

“Lots of people on middle incomes are struggling right now, too. So we have decided to provide the council tax rebate to households in bands A to D. This means around 80% of all homes in England will benefit.”

He added: “And the third part of our plan will provide local authorities with a discretionary fund of nearly £150 million to help those lower income households who happen to live in higher council tax properties, and households in bands A to D who are exempt from council tax at all.”

How will that loan be repaid?

Energy companies will be expected to pay the loan back.

That means while customers are protected from the worst of April’s price rises, it is likely they will eventually pay the same amount to their energy supplier in the long run.

And this plan depends on a fall in the record-high price that energy suppliers are currently paying for the gas and electricity they buy.

If this price does not significantly drop, bills will need to rise further to recoup the loan money down the line.

Some experts predict that high energy prices are probably here to stay for a couple of years.

If prices fall, the scheme would likely mean these drops in wholesale costs will not be passed on to customers until the government-backed loans have been repaid.

In a nutshell - the net effect is that bills rise by less in the next year than they otherwise would do, but fall by less than they otherwise would do in the years to come.

Should I shop around for my energy?

Energy companies are recommending you stay put because the price cap is generally the best deal on the market currently.

Several suppliers are trying to encourage customers to sign up to long-term fixed-rate deals to offset any future rises, however, it remains to be seen whether they represent good value for money.

If you can find a fixed rate that is less than 50% more than what you pay now then it could be worth considering. That’s because the energy price cap could rise by at least 50%.

Much depends on your own circumstances.

I’m worried by these rises, what support is available?

If you are on a low income or claim pension credit, you may eligible for Warm Home Discount through your supplier.

This cuts bills with a one-off discount of £140 at some point between September and March - which will be take off your bill rather than paid directly to you.

You must contact your supplier to confirm your eligibility and apply, though the number of discounts a supplier can give is limited.

If you fall behind on payments, there are suppliers that offer grants. Citizen's Advice Bureau (CAB) lists suppliers that offer grants:

If none of these companies supplies your energy, you can still apply for a grant though British Gas Energy Trust as you do not need to be a customer.

Applications can be time consuming. For help, CAB advises to reach out to one of its advisers or to contact Money Helper.

Meanwhile, Simple Energy Advice offers a tool on its website to locate grants available in your specific area.

Your local council may also provide various grants.