The new energy price cap is now in effect and while we are now seeing a welcomed drop in gas and electricity prices, experts fear they could rise again come October.

Energy regulator Ofgem’s new price cap for England, Wales, and Scotland came into force on Monday, June 1, and as a result, a typical household’s energy bills will fall by £122 a year. That brings down the bill for a household using a typical amount of gas and electricity to £1,568 a year, the lowest for two years.

However, experts warn that the prices it to rise again come October, in the run-up to winter, and the increase is predicted to more than erase the savings now. Cornwall Insight predicts that a typical household's annual bill will be back up to £1,723 in October, a £155, or 10%, increase from now.

What is the energy price cap?

The energy price cap limits the amount energy suppliers can charge people for their gas and electricity. This limit is set by the energy regulator for Great Britain, Ofgem.

The price cap was first introduced in 2019 due to concerns that customers were being charged a ‘loyalty penalty’ as they were renewing with the same suppliers, who were driving prices up.

It is reviewed every three months.

What is the current energy price cap?

Gas and electricity rates for England, Wales and Scotland from 1 July to 30 September 2024.

Electricity:

Unit rate: 22.36p per kWh

Standing charge: 60.12p per day

Gas:

Unit rate: 5.48p per kWh

Standing charge: 31.41p per day

How is the energy price cap set?

The energy price cap is a temporary measure which limits the amount that a supplier can charge for their default tariff. This includes:

• The standing charge - the daily fixed amount you have to pay, no matter how much energy you use.
• The price for each unit of electricity and gas you use, measured in pence per kilowatt hour, or p/kWh.

According to an Ofgem spokesperson:

“It’s Ofgem’s task – as the energy regulator we’ve been given special duties by the UK government – to set the level of the cap during this time. Every six months we work out how much it costs a supplier, on average, to get energy to you. We then revise the cap level to reflect this to ensure you pay a fair price, and to protect against overcharging. Suppliers must cut their prices to the level or below the cap we set. If costs fall, the cap makes sure suppliers pass on savings.  Equally, if costs rise then you can have peace of mind that the cap ensures that any price rise is justified based on what it costs to get energy to you.”

When will the price cap next change?

Ofgem reviews the price cap every three months, so the next review will be for the period of October 1 to December 31, 2024. The new price cap will be determined on August 27, 2024.

Am I protected by the price cap?

You’re price protected if you are on a ‘standard variable’ energy tariff or a tariff you haven’t chosen (a ‘default’ tariff). You are also protected if you use a prepayment meter, or pay by direct debit or standard credit. You are protected no matter what supplier you’re with.

You don’t need to do anything to be price protected – your supplier must apply the cap.

Understanding the tariffs:

These are an energy supplier’s basic offer and tend to apply if you haven’t shopped around for a better deal.

According to Ofgem, they are typically poor value and more expensive than a non-default, fixed-term contract deal which you can choose to switch to. You will often need to renew fixed-term contracts after a year or more. You could be put on a ‘default’ tariff if your fixed-term contract ends and you’ve not shopped around to choose a new one.

Acquisition-only tariffs:

A coalition comprising of consumer organisations and energy firms, including Which?, E.ON, Octopus, So Energy, the End Fuel Poverty Coalition, Citizens Advice, and Fair by Design have called on Ofgem to reassess its plans to remove acquisition-only energy tariffs. They expressed worries about the impact on existing customers facing higher costs if they are unable to access competitive deals typically offered to new customers or switchers.

Ofgem has proposed lifting the ban from 1st October 2024, prompting concerns that loyal customers might be disadvantaged.

In their joint letter to Ofgem, the coalition emphasises the lessons learned from the collapse of over 30 suppliers who offered unsustainable tariffs, leaving behind substantial unpaid energy costs that were eventually passed on to consumers through higher bills.

Why are the electricity rates higher than gas?

A large amount of the electricity used in the UK comes from renewable sources like solar and wind. However,  when these renewables aren’t generating enough power, the UK continues to rely on gas to meet demands.

Electricity demand tends to be highest when the sun sets and renewable sources are less likely to be generating enough. This means we have to turn to gas to meet this demand, which is more expensive and drives up energy bills.

How much will I save?

Your capped tariff will depend on many things:

• How you pay (direct debit or standard credit)
• Where you live
• What type of meter you have

Even with the energy price cap in place, you should speak with your energy broker or supplier directly if you did not use a broker to ensure you are continuing to get the best deal available to you. Ensure you have your most recent energy bill and meter readings to get an accurate insight.

What support is available?

National Debtline said its findings suggested 6.1 million people were struggling to pay their energy bills, despite dropping prices.

Ofgem has announced plans to extend the provisions for bad debt support in the energy price cap beyond September 2024. This decision comes in response to increasing levels of debt and arrears among energy customers due to the ongoing cost of living crisis.

The initial allowance for bad debt associated with additional support credit (ASC) was introduced in October 2023 for 12 months.

Ofgem is considering three potential approaches for managing ASC costs beyond September 2024: ending the ASC allowance as originally scheduled, extending the current ASC allowance, or reviewing and adjusting the size of the ASC allowance using the most recent data.

The regulator’s preferred option is to extend the current allowance.

What the experts say:

Responding to Ofgem’s latest price cap announcement today, Mike Thornton, chief executive of Energy Saving Trust said:  

“Confirmation that energy prices are coming down for the next quarter is very welcome. However, no one should take this lower price cap as a sign of stability. Forecasts show that energy prices are set to rise again this autumn and will be staying high overall for the next decade.

“After the election, the incoming UK government must prioritise policies that support people to use less energy and install cost-effective energy efficiency improvements in their homes. This will be fundamental to bringing down energy bills, reducing carbon emissions and guaranteeing our energy security for the long term.

“A coordinated, long-term retrofit plan for England which incentivises measures from improved insulation to electrified heat must be central to any incoming UK government’s ambition. Now is the time to commit to making our homes ready for a net zero future and ending our dependence on volatile international fossil fuel markets for good.”