The Ofgem price cap explained

What’s currently happening?

The UK is currently gripped by rising prices across the board: in National Insurance payments, council tax rates, and in the energy market. The price of commercial energy is set to soar by 54% in April, equating to an additional £693, introduced through the new energy price cap by Ofgem, today. This is much more than analysts had predicted and many around the country are starting to worry. 

We’ve already seen rising energy costs as in October last year, it had risen by 12% to £1,277, it had been £1,042 during the same time in the previous year. This energy price cap is very generous, even though Ofgem is trying to alleviate the surmounting costs through bi-annual reviews. 

The energy price cap will come into effect on the 1st of April and will affect approximately 22 million customers on default tariffs who are paying by direct debit will see the largest increase. A worrying statistic as many use this way to pay for their gas. 

Since gas prices are still on the rise, the regulatory body Ofgem is doing all it can to help those who are being pushed into fuel poverty. They are here to set out ways to prevent us from paying even more for our gas and electricity supplies. However, with the additional £693 being added, it now will total the spending in a household to just under £2,000 a year. 

Why are gas prices rising?

It is worth noting that the energy price cap can only limit the amount you will have to pay for each unit of gas and electricity. There is no limit for how much you can be charged for home energy as the more you use, the more you will have to pay. 

Historically, fixed energy deals have been cheaper than variable alternatives. Although, the sudden spike in wholesale energy costs has forced suppliers to sell gas and electricity at a loss. But no one is willing to buy these deals. 

Part of the main reason that energy prices have been on the rise in the last 6 months is that it’s a global issue, and it has caused prices to quadruple in the last year. Because of the rising prices, it will mostly affect customers who are on the default tariff and haven’t switched to the fixed tariffs offered by most energy suppliers. 

Ofgem’s reasoning for this is that they track wholesale prices and review them bi-annually. Which gives them all of the resources they need to introduce energy price caps to the UK energy customers. Despite their efforts to try and help the customers affected by the many suppliers who went bust over the last year, those who have been moved to other providers will also be affected by this energy price cap if they have not moved to a fixed tariff. 

Why is there an energy price cap?

As previously mentioned, the government-run regulator Ofgem holds bi-annual reviews of current wholesale energy prices to see how they can help UK customers. They hold these reviews to ensure energy consumers pay a fair price for their energy while preventing energy companies from making excessive profits. 

By imposing an energy price cap, energy companies are allowed to pass on all reasonable costs to their customers, including gas price increases. Despite the unprecedented record rise in gas prices since August, the current cap does not reflect the current level.

Around 4.3 million domestic customers have been affected by 29 energy companies leaving the market or going into special administration during the last year. In order to prevent companies from going bankrupt and to cushion the blow to the energy prices of everyday people, Ofgem has issued a set of regulations.

Because of Ofgem’s position, they want to protect customers the most and make sure that their regulations seek out to protect many vulnerable people throughout the country. As millions are already in poverty in the UK, with many more to join them in the emerging fuel poverty situation, the energy price cap is needed to help many get through what could be a very difficult period to come.

Who will it affect?

Homeowners are set to see the biggest increase in their energy bills, although businesses won’t fully avoid the amounting situation and could see their bills go up as a result. The worst affected area in England is Bradford because many fall into the areas included in the top 5% highest energy bills whilst being in the lowest 5% for income. 

This is partly due to the way many of the houses were built before the 1950s. Because of the terrace-style that dominates the city, many houses don’t have a cavity wall, lacking the much-needed insulation that could help many homeowners save money on their energy bills, especially in the winter months when temperatures tend to plummet. 

However, the catastrophic effects of the introduced energy price cap will affect millions as it will put a quarter of the population into fuel poverty. Despite the government’s efforts to assist the most vulnerable, there will still be shortcomings for many, as they will have to decide between fueling their homes and other necessities. 

Other areas affected are Manchester and Birmingham, two major English cities that have helped power the country through the industrial revolution and remain powerhouses for the country. Although, both of these cities already have more than 20% of their residents in fuel poverty, discovered as of 2019. Almost three years later, we are still seeing more and more places where the number of people in fuel poverty will continue to increase.

Ways to try and tackle it

Despite the troubling times ahead for a lot of people, there are some ways people can alleviate their energy consumption. Firstly, there will be government discounts for those who are struggling. 

Take a look at the government site to see more information here: https://www.gov.uk/government/news/millions-to-receive-350-boost-to-help-with-rising-energy-costs

Luckily, due to the increased energy price cap, customers will be able to contact their energy suppliers to request discounts since many will be flexible for those on the lowest incomes. 

Although, the best two ways to help with your bills are by using a smart meter, as these can help you find out what is costing you the most in your monthly energy bills. And another way is to switch energy providers. Because the energy price cap will affect so many of us, it is important to note that you are always in charge of who you are with, especially since the hardest affected will be those out of fixed-rate tariffs.

Take a look at our competitive comparisons to see where you can make the most savings as the energy price cap comes into force. We want you to be safe during the energy crisis and hope some of these tips will assist you in keeping your energy consumption and spending low.

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