Energy Price Cap

How the price cap works: Your home energy renewal guide

The UK energy price cap is a consumer market instrument.

Great Annual Savings Group (GAS) is a B2B cost reduction specialist, but the business puts sharp focus on the impacts it has in its operational communities.  From the launch of GF Community Foundation to social, cultural and economic impact monitoring, GAS has a strong history of corporate social responsibility and leaving a positive footprint.

With community impacts in mind, this blog has been created to inform consumers on energy procurement best practice as startling household energy renewal offers reach households around the country.

NOTE: GAS does not operate in the consumer energy market and cannot offer household energy procurement.  This blog is for genuine informational purposes, in response to the experiences of our colleagues and customers.

The energy price crisis

The current energy market price volatility will impact everyone in the country as part of a national cost of living crisis, but it will be the most vulnerable who are hit the hardest.

Warnings have suggested that more than 8.5 million UK households will be plunged into fuel poverty as a result of the wholesale price of gas skyrocketing.

This wholesale price has a profound effect on the “commodity” element of energy bills, which makes up approximately 40 per cent.

Renewal offers

The actual energy contracts available on the market are astronomical in comparison to 12 months ago.  Some have more than quadrupled.

The below renewal offer reached one of our GAS colleagues in March 2022, offering them an energy bill increase of 420 per cent to a staggering £807 per month.

The figure below shows the unit rates on offer for gas and electricity for a one-year contract.

The energy price cap

Introduced in 2019 by energy market regulator Ofgem, the price cap protects consumers who stray into dangerous “variable tariffs”, also known as “out of contract” or “deemed” rates.

It means that nobody can be charged more than the price cap if they lapse outside of a contract.

Households outside of a contract now pay no more than a set unit rate and standing charge for their electricity or gas.

The current price cap.

Gas Unit rate: 4.07p per kWh
Standing charge: 26.12p per day
Electricity Unit rate: 20.8p per kWh
Standing charge: 24.88p per kWh

 

Based on an average household usage, that would equal £1,277 per year.

In February 2022, the price cap was increased, simply due to the fact that the rising wholesale market made those prices unviable for energy suppliers to trade.

The increase was a stark 54 per cent and attracted criticism from around the country, from charities to residents to watchdogs.

The new price cap comes into force on 1 April 2022.

Gas Unit rate: 7.37p per kWh*
Standing charge: 27.22p per kWh*
Electricity Unit rate: 28.34p per kWh*
Standing charge: 45.34p per kWh*

*Tiny regional variations may apply

Now, if a household is not within an energy deal, average usage would equal a maximum cost of £1,971 per year.

The new price cap is now in place until October 2022.  Any further changes will be communicated in August 2022.  However, Ofgem has allowed itself to update the price cap sooner in “exceptional circumstances”.  Effectively, this means it could be updated at any time in 2022.

Energy contracts vs the energy price cap

Historically, it has been entrenched guidance for UK households to switch their supplier and contract annually to take advantage of the super-competitive market and attain the best possible deal.

However, that was turned on its head in the second half of 2021, when contracts became more expensive than the price cap.

Price comparison sites have essentially written off energy revenue and have spent months advising users NOT to switch their energy deals

As you can see from the GAS colleague’s renewal offers and unit rates in the figures above, the renewal offer is almost double the new price cap coming into force in April 2022.

Guidance and tips to minimise price rises

The following steps outline a sensible course of action for households to manage energy costs during the current price crisis.

  • Compare your renewal unit rate and standing charge prices to the price cap detailed above. If the price cap is cheaper, let yourself roll onto your supplier’s standard variable rate.  Usually, you do not need to take any action for this to happen.
  • One of the advantages of being “out of contract” is that you can negotiate a new one at any time. So, keep a close eye on pricing.  Check comparisons and supplier websites weekly to take a temperature check of the market.  If you find a deal cheaper than the price cap, you can take it immediately.
  • Plan for winter 2022/23. In winter more energy is used by households and we know that the world’s financial and commodity markets are incredibly volatile at present.  It is unlikely we will see energy prices drop this year.  That means the price cap will probably rise again in October (announced August).  If you can afford to save a little each month with this in mind, you should do so.  Early estimates currently suggest it could rise to a total of £3,000 per year for the average usage household.
  • As we always tell our business customers, the best way to spend less on energy is to use less. Ensure your home’s heating and hot water controls are set to timers when you strictly need them on.  Do not leave doors and windows open unnecessarily, put lights and appliances on timers, do not leave applications switched on standby mode, power them off completely.
  • If you are in the fortunate position to be able to consider renewable installations at your home, such as solar photovoltaic (PV) panels, it may be worthwhile to take that leap and reduce your reliance on the grid. NOTE: you should always consult an expert on renewable installation projects.  Great Annual Savings does not offer this service to households or the consumer market, only businesses.

For those who are afraid they cannot afford their energy bills

The key piece of advice is always to speak to your energy supplier.  They can offer payment plans and other solutions where appropriate.  Your supplier should be your first port of call, before debt becomes an issue for you.

This problem is about to become more common in the UK.  It is not something to be ashamed or embarrassed about, but is a situation to be managed effectively in partnership with your supplier.

It is important to remember that disconnection is an absolute last resort for energy suppliers and they do not want to disconnect you.  If you have been in dialogue with them, it is very unusual for a household to be disconnected.

More advice is available via Citizens Advice and there are several fuel poverty charities and helplines available through local authorities to contact in addition to your supplier.

Great Annual Savings and businesses

GAS is a business cost reduction expert and has spent almost 10 years advising businesses on their energy strategy.

The price cap outlined in this blog DOES NOT EXIST for businesses, who are facing this crisis without its protection.  GAS is providing essential support to businesses who are struggling to attain suitable contracts.

Speak to us for free, no-obligation advice today by completing the contact form on the right of this page or via 0800 130 3514.

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Paul JohnsonGroup Financial Director

Paul Johnson is very much a home-grown talent.

He joined Great Annual Savings Group in its infancy, fresh from a youth career as a professional footballer with Hartlepool United.  He quickly established a reputation within the business and aced all required accountancy qualifications in the space of four years to become the Group’s Management Accountant.

Several successful projects later, Paul was promoted to Head of Finance.  When the former FD left GAS, he took on the mantle of the business’ most senior finance professional; boasting a string of incredible achievements all under the age of 30.

Quote:

“I have witnessed phenomenal growth at the Group over the many years I’ve worked here and I’m looking forward to guiding the Group into an exciting new chapter.”

Interesting fact:

Paul made his professional debut for Hartlepool United against Bournemouth in the Football League.  Some say Danny Ings still resides in his pocket to this day.