Lowering bills, cutting carbon
08 Jun 2023
The maximum price energy suppliers are allowed to charge domestic consumers, known as the price cap, is set to decrease. The 1 July price cap will mark the first time prices have dropped since the start of the energy crisis in 2021. But with the Energy Price Guarantee set to increase to £3000, what does this actually mean for energy bills in the UK?
To understand why bills are going up, you first need to understand the price protections that have been introduced by government to protect consumers. There are two:
The government is currently using two different pieces of regulation to limit the energy prices paid by households. The first of these is the ‘price cap’. The price cap was introduced in 2019 to put an upper limit on the most expensive tariffs offered by suppliers, and changes every quarter to reflect wholesale energy prices – the price energy suppliers have had to pay for the energy they then sell to homes.
Because the price cap follows wholesale energy prices, when these started to rocket during autumn 2021, so did the price cap. So, in October 2022, the government introduced an additional scheme, called the Energy Price Guarantee, which applies a discount to the price cap to ensure bills for a typical home can’t rise above a certain level. At the moment, the Energy Price Guarantee is keeping bills for a typical home at the equivalent of £2,500 a year. From July 1st, the price cap will be £2074.
There are a few simple facts that make it much easier to understand the price cap and how it affects you. Whenever you see the price cap mentioned, remember these points:
The only things you really need to look at when it comes to understanding your bill are the unit rate (how much you pay per kilowatt hour of energy you use) and the standing charge (how much your supplier charges you each day to be connected to the energy grid). If you get used to looking at these charges, and understanding how they’ve changed with each new price cap announcement, it’s a better way to assess the impact of any changes than looking at the annual bill for a typical home.
From 1 July 2023, the price cap is falling to the equivalent of £2,074 for a typical home – a huge decrease from the current cap of £3,280 a year. That will bring the price cap below the maximum level set by the Energy Price Guarantee. Remember, the Energy Price Guarantee applies a discount to the price cap, so if the cap falls below the Energy Price Guarantee level, there will no longer be any discount applied.
Since the start of 2023, the wholesale prices paid by suppliers for the energy they sell to households has fallen dramatically. Those falls are now being reflected in the new price cap.
The fall in the level of the 1 July price cap means that most UK households will pay less for their energy.
But, it’s important to note that although there has been a big fall in the price cap, it remains significantly higher than the average before 2021. While today’s price cap level is lower than the previous quarter, it is still more than double its pre-crisis levels. Consequently, many households may continue to face challenges in managing their energy bills.
Probably. The price cap is also designed to allow suppliers to make a profit, which means they can choose to reduce that profit in order to offer cheaper tariffs and win new customers. In fact, some suppliers are offering a limited number of existing customers a fixed rate. This includes British Gas, Eon Next and OVO Energy. You should check with your supplier to see whether you’re eligible, and look carefully at the rate you’re offered before accepting. Fixing now could mean you miss out on cheaper deals once the new price cap takes effect in July.
That said, a piece of regulation known as the ‘Market Stabilisation Charge’ (MSC) is likely to reduce any potential savings.
The MSC has its origins in the early months of the energy crisis in 2021, when many smaller suppliers went bust. Part of the reason for this was because they had not bought enough of the energy they’d need to sell to customers in advance (a practice known as ‘hedging’). Buying in advance gives suppliers certainty over the price they’ll pay for the energy the sell on, but it also limits their ability to pass on falls in wholesale prices to their customers – once they’ve committed to a price, that’s the price they’ll pay.
Because many smaller suppliers hadn’t bought energy in advance for many of their customers, when wholesale prices started to rise, they were left out of pocket – particularly because the price cap prevented them from passing those costs on to customers immediately.
To avoid this happening again, the UK energy regulator, Ofgem, put pressure on the remaining suppliers to ‘hedge’ much more of the energy they were likely to need to sell in the future. That means that your supplier has probably already bought some of the energy you’ll use in future months, even though they don’t know you’ll still be their customer. If you were to move to a different supplier, they would be left having to pay for energy that they might not be able to sell.
That’s where the Market Stabilisation Charge comes in. The MSC requires domestic suppliers acquiring customers to compensate the losing supplier if that supplier has already bought energy for that customer. The charge is triggered if wholesale prices fall by more than 10% relative to the price paid by the losing supplier.
This makes it much less appealing for a supplier to pass on falling wholesale prices to new customers, because there’s a good chance they’ll then have to pay compensation to those customers’ old suppliers.
This charge came into effect along with the ban on ‘acquisition-only’ tariffs, which will reduce the power of suppliers to pull in customers with exclusive cheaper tariffs.
Yes – you don’t need to wait for suppliers to offer cheaper tariffs. Under the terms of their supply licence, energy suppliers are obliged to take a customer if they request to be switched to one of their tariffs, so if you’re stuck with a supplier you don’t like, you can ask to move to an alternative supplier on a price cap-protected standard variable tariff.
Because the previous Energy Price Guarantee was set at £2,500, the new 1 July price cap of £2,074 means that a ‘typical’ household will save the equivalent of £426 a year. Again, remember that your actual savings will depend on how much energy you use.
It’s also important to remember that energy bills in the summer are usually lower than the winter (see Cornwall Insight’s predictions below), because the cost of procuring energy is cheaper. The energy price cap is predicted to decrease again in October before increasing in January 2024, so the cost of energy will still vary throughout the next 12 months.
Cornwall Insight’s Default Tariff Cap forecasts (dual fuel, direct debit customer, national average figures):
Monitoring usage and exploring options for reducing your energy consumption or generating electricity at home, such as our home energy assessments may help reduce energy bills and cut carbon for good.