Energy price cap explained: Will you actually save money?

Don’t take it for granted that you’ll automatically get the best price on your bills.

In January 2019 Ofgem, the energy regulator, took action to save consumers money on their gas and electricity bills by introducing a cap on how much energy companies can charge you.

It sounds like good news, and people will have paid less as a result. but there are downsides too. Not everyone benefits, and as the latest announcement shows, it doesn’t stop huge price hikes.

Plus there’s the danger that billpayers will get complacent when there are still ways to cut bills to far lower prices.

Here’s what you need to know to make sure you’re still paying as little as possible on your energy.

How the energy cap works

The cap applies to the price for your gas and electricity on your energy company’s default or standard variable rates. These basically can go up and down whenever the energy company likes. With the cap, the energy companies have to make sure their tariffs aren’t higher than the set rate.

The prices set on the cap are the maximum price per unit, not per bill. So any prices you see are based on a typical user. So if you use more energy, you’ll pay more than the cap every year. Use less and you’ll pay less.

The cap will also vary depending on where you live in the UK, how you pay (eg Direct Debit) and the type of meter (credit or prepayment). It’s due to end in 2023, but could be dropped sooner.

Finally, the cap is reviewed every six months (in January and August) with new caps beginning in the April and October of each year. This means you could see a hike or drop in your tariff twice a year on variable rate tariffs.

Though it’s based on a number of factors, the wholesale oil price is the one that’s most likely to impact those reviews.

How much the cap will increase in October 2021

The latest announcement (in early August) is for an increase to the price cap from October 2021.

The new cap for a household with average use is £1,277 a year. That’s £139 more than the current price cap, and the second price increase in a row.

And over the year October 2020 to October 2021, average bills on tariffs meeting the cap will be £235 more.

This price will last for six months, with the next review due to be announced in early 2022.

DatePrice cap for a typical householdChange +/-
January to March 2019£1,137
April to September 2019£1,254+10.2%
October 2019 to March 2020£1,179-6%
April to September 2020£1,126-4.5%
October 2020 to March 2021£1,042-7.5%
April to September 2021£1,138+9%
October 2021 to March 2022£1,277+12%
Price caps since start in 2019

Does the energy cap actually save you money?

If you’re on a variable tarrif

Broadly, anyone on a standard tariff will spending less thanks to the fix. In the short term at least.

When it was first launched it was predicted that roughly 11 million households would have saved around £76 a year. That’s a huge number of people who would have paid less based on what they would have been charged without the cap.

That saving varied massively depending on who your supplier was. Ofgem figures showed that whereas British Gas’s variable deal was £68 over the cap (based on a typical user), Scottish Power’s top rate was £120 higher.

However, six months later the cap actually increased, so if your energy company increased its rate to that new higher cap, your bills would have gone up and your annual saving would have fallen.

Still, even if prices do go up, it will hopefully still be less than you’d pay if the cap wasn’t there.

Even so, even with the cap it doesn’t mean you’re on the cheapest deal. For most energy companies, the standard variable tariff, even with a cap, is going to be the most expensive option.

If you’re on a fixed tariff

Very simply, your prices don’t change during a fix. That’s because they’ve already set a price per unit of energy for a fixed length of time, usually 12 months.

Fixed deals are usually a fair bit less than the variable rates, so it’s most likely not an issue. The only time it could end up costing you more is if there was a massive cut to the cap, which saw prices drop below your fixed rate.

Though some fixed deals let you move penalty-free, most will hit you with a charge that’ll likely wipe out any savings you’d get from switching.

Of course, when your fix does end the cap can have an impact on the next tariff you choose. Theoretically, any cuts to the cap should mean fixes are cheaper.

But if prices have shot up massively since the last cap announcement then fixes will creep closer to the existing cap to try and make up some of the shortfalls in the oil prices energy companies pay and the charges they can pass to customers.

I still think this type of deal is still the best option the vast majority of the time, and I’ve more tips on how to get the best price below.

How to get the cheapest energy deals

I’ve written about cutting energy bills a few times, so I won’t repeat myself in too much detail here (you can read more in the articles listed a bit further down the page).

But here’s the three essential steps you need to make sure you’re always paying less than the new cap.

1. Compare your energy bills.

I use Money Saving Expert’s Cheap Energy Club as I think it gives the fairest comparison. It will take you 10 minutes. JUST 10 MINUTES. Bear in mind that prices (and savings) will be based on the current price, and won’t reflect any increase to the price cap until those charges actually begin.

2. Look for a fixed deal.

Though sometimes variable rates can be cheaper, I always go for a fixed deal as it guarantees you won’t see any increases for the length of the fix, usually 12 months.

You can switch within the comparison site you used or head to Quidco or Topcashback to see if you can get any extra cash on top.

3. Do it again

Make a note in your diary for a month before your fixed deal ends, and repeat the process. Automatic switching services can do this for you, but I prefer to do it myself.

Listen to my podcast from when the price cap was introduced in 2019

2 thoughts on “Energy price cap explained: Will you actually save money?

  1. Andy, My current tarrif ends on 15th November. Should I opt to switch before 1st October or make the most of the 1
    Month’s deal?

    1. Hi Daniel, it’s hard to say but you will need to take into account any exit fees (though these are waived 49 days before your tariff ends). I’d expect the new rates to be so much higher that you’d save the difference by switching before.

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