The Energy Price Cap Policy came into action on October 1st. But what does it mean for your bills?
As the new Prime Minister stepped into Downing Street, her first move was to address the soaring energy prices. But since its announcement, the policy has been a source of confusion and misunderstanding.
Liz Truss announced an energy price cap policy at £2,500 a year for the next two years until 2024, summoning a national sigh of relief. This policy has prevented the predicted price jump from £1,971 to £3,549.
But amid headlines and misinformation, there seems to be general confusion around what exactly the price policy means for the UK.
How has the capped price been calculated?
In the past, the regulator called the shots. Ofgem, The Office of Gas and Electricity Markets, held the power to decide how much energy suppliers could charge on variable tariffs. Ofgem has been able to cap the price per unit and the fixed daily cost for gas and electricity by multiplying this number by the average household usage over the course of the year.
Could I end up spending more than £2,500?
The general misunderstanding is that you won’t be able to exceed the capped amount. It’s incredibly important to recognise that this amount only applies to the average household usage, who pay for both their gas and electricity by direct debit. The amount you’re billed each month will vary depending on usage, location, any existing deals with the energy company or metering arrangement. This essentially means that if you use more, you pay more. If you use less, you pay less.
What is the ‘average’ household?
It’s a word that’s been thrown around a lot. But what does it mean? What is an average consumption?
If you live in a 2-3 bedroom home, you’ve got a good chance of falling into this category. According to our familiar friend Ofgem, the ‘average’ home uses 12,000 kWh of gas and 2,900 kWh of electricity over the course of a year. The unit price for an average unit is capped at 34.0p per kWh of electricity and 10.3p per kWh for gas, meaning you’ll be saving about £1,000 a year (on average).
What if I’ve already agreed a deal?
What feels like a relief to so many, has thrown a curveball for some.
A lot of us geared up in preparation for the price hike. The looming threat of rocketing bills flying past £6,616 meant many opted to air on the side of caution. Signing up for fixed-rate deals, and protecting themselves from predicted increases, seemed like the smartest move. These customers have now been left reeling after the price cap announcement, fretting their bills will end up through the roof compared to those paying on a standard variable tariff. If you have signed up for a fixed-rate deal, there are ways out. But be prepared for an exit fee of up to £300. So much for fail to prepare, prepare to fail.
But it’s not all doom and gloom. For those of you who need it, support is being offered. Anyone on a fixed-rate deal should keep an eye out for scheduled discounts on their electricity and gas units.
If you were fortunate enough to secure a deal below the price cap, you won’t see any change. Lucky you.
Where’s the money coming from?
The scheme involves reducing the price of the unit cost of energy for the customers. But this means the UK government has to subsidise the missing cash for the energy companies. The government plans to bridge the gap between the price of gas and electricity and the amount customers are paying and they’re planning on funding it through increased borrowing.
What do I need to do?
The short answer is…nothing. As long as you’re on a standard variable tariff, you can sit back and relax. No need to apply for the scheme or get in contact with your supplier, the energy price policy will be applied to your bill without you having to raise a finger.
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