Energy price cap increase: what does it mean for your bills?

Old empty wallet in hands.

The energy price cap will rise in October, meaning higher energy prices for those on standard tariffs.

So how much is the rise likely to cost the average household? And how can you cut the cost of your energy going forward? Let’s take a look.

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Energy prices: What’s happening to the price cap?

On 1 October, the energy price cap, set by the government’s energy regular Ofgem, will increase by an average of 12% for those on billed meters. If you’re on a prepaid energy meter, the cap will increase by 13%.

While the energy price cap is the maximum rate at which providers can set their prices, all of the big energy firms are planning to hike their prices right up to the cap. 

It’s worth remembering that the energy price cap is only used to limit the cost of energy per unit. It doesn’t place a cap on the maximum you can be charged for your energy usage. In simple terms, the more energy you use, the higher your bill regardless of the price cap.

How will the increase impact energy prices?

According to Ofgem data, the average standard variable energy tariff in the UK costs £1,131 per year.

Therefore, if you have typical energy usage, your bill will increase by roughly £12 per month – or £140 per year – based on the new cap.

However, it’s worth knowing that the price cap, which is based on wholesale energy prices, only lasts for six months.

Should wholesale prices continue to rise, the cap could increase further when it is reviewed in April next year. If this happens, energy prices will almost certainly rise again.

How can you cut the cost of your energy?

There are two ways to cut the cost of your energy bill.

1. Take practical measures

The first way is to take practical measures to lower your consumption. This can include properly insulating your home, replacing your boiler with a more efficient model, or lowering your thermostat.

For more practical tips, see our article on how to keep your energy bills down.

2. Change your tariff

The second way of cutting energy costs is to ensure that you are on the right tariff.

Sadly, the majority of people in the UK are stuck on what is known as a ‘standard variable tariff’ (SVR). This tariff is often expensive, especially from one of the big-name energy suppliers. Therefore, to lower energy prices, you may wish to explore changing your energy tariff. 

Before you change your tariff, it’s worth understanding how much energy you use so you can determine how much you can save. Once you’ve got this figure, you can put it into price comparison websites and compare options.

If you don’t want to switch providers, it’s often possible to move to a cheaper tariff with your existing supplier

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What types of energy tariffs are there?

There are two types of energy tariffs: fixed and variable. 

Fixed tariffs mean that the cost per unit of your energy won’t rise for a certain period of time. These tariffs can be a good option if you worry about future energy price rises. However, do bear in mind that some fixed tariffs charge early exit fees if you leave within the fixed period.

Variable tariffs, on the other hand, mean that the cost per unit of energy can change in the future. In other words, there’s no guarantee that your energy prices will not rise over a set period of time.

What’s the purpose of the cap on energy prices?

The purpose of the energy price cap is to ensure that energy prices are manageable for those who do not compare prices. This often includes vulnerable or elderly groups.

Following the introduction of the cap, many stuck on their supplier’s SVR witnessed a fall in their energy prices.

However, the cap has also come under criticism. That’s because some feel that the price cap makes it less likely that people will bother to shop around for their energy in order to get a cheaper deal. In other words, some may rely solely on the price cap to cut their bills.

Others say that the price cap will eventually turn into the maximum amount that energy companies can ‘get away with’. They say that companies will always implement price rises when the cap increases. Following next month’s price hikes, it does seem as though this initial fear has been proved correct. 

Are you currently working at home and concerned about rising costs? Read our article on how you can save energy while working from home.

The post Energy price cap increase: what does it mean for your bills? appeared first on The Motley Fool UK.

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