Energy price cap: how Ofgem’s cap on electricity and gas bills works as millions of households set to save money this winter
Households will save on both default tariffs and prepayment meters due to the changes
Energy bills are set to drop for millions of people this autumn, after the energy regulator Ofgem lowered the price cap.
Cheaper gas wholesale prices mean that Ofgem were able to cut the default price cap from £1,126 to £1,042.
This is the lowest it has been since the cap was first introduced back in 2019.
Here’s what you need to know.
How much will households save?
Ofgem said that the cap will fall from £1,126 to £1,042 from October to March, estimating that 11 million households on default energy tariffs will save £84 over the winter period.
Alongside this, 4million households on prepayment metres will see bills fall by £95, as the cap drops to £1,070.
What are default tariffs?
Default tariffs are a basic tariff from an energy supplier, whereas a prepayment meter is a special type of energy meter that can be installed in domestic properties, allowing you to pay for your energy before you use it.
Why has the price cap lowered?
The reduction was due to a decrease in wholesale gas prices since the cap was last updated in February, Ofgem said.
Jonathan Brearley, Chief Executive of Ofgem, said: "Millions of households, many of whom face financial hardship due to the Covid-19 crisis, will see big savings on their energy bills this winter when the level of the cap is reduced.”
However, Mr Brearly added that people can also reduce their energy bills further by shopping around.
"They can also reduce their energy bills further by shopping around for a better deal. Ofgem will continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy market,” adds Mr Brearly.
Could the price cap go back up?
Ofgem adjusts the level of the price cap twice a year in order to reflect the estimated costs of supplying both electricity and gas to homes for the next six months.
The regulator has said that if wholesale energy prices continue to rise over the upcoming months, then the cap is likely to rise in April in order to reflect these higher costs.
Suppliers can’t charge customers on default deals more than the level of the cap. However, they can charge them less.
This is in place to ensure that these customers pay a fairer price for their energy.
Is the price cap an effective way of saving on energy bills?
Although the price cap is beneficial for many households, shopping around is the best way to save money on Energy bills, says Ed Dodman, director of regulatory affairs at Energy Ombudsman.
Mr Dodman said: "This reduction in the price cap represents a much-needed financial boost for millions of households, at a time when many people are struggling due to the economic impact of Covid-19 and lockdown.
"Shopping around for a cheaper energy deal is still the best way to save money, particularly for customers on standard variable tariffs, but before switching to a new supplier it’s a good idea to check out its customer service credentials.
Mr Dodman explains that using review sites and other online tools can give you an idea of the quality of service on offer, helping you make an informed decision when switching suppliers.