Hard-up households have heaved a collective sigh of relief this morning at the news that energy prices are finally set to fall.
Energy regulator Ofgem has confirmed that the new price cap for people who pay by direct debit, which will kick in on July 1, will be £2074, an £426 reduction on the current price cap of £3,280, announced in February. However, due to the way the price cap timings work, families will have to wait nearly two months before they see the changes in their bills.
The new cap depends on how you pay your bills:
Direct debit: £2074
Prepayment meter: £2077
On receipt of bills: £2211
The drop comes after weeks of speculation that the cap would drop below the Energy Price Guarantee (EPG) level of £2,500, with energy analysts Cornwall Insight making their final prediction that the cap would be around £2055 late last week, slightly lower than the figure announced this morning. Although Ofgem remained tight-lipped about the exact amount until the announcement at 7am today, its strategy head confirmed that "what we currently pay will come down considerably" last week when pressed by Martin Lewis on Good Morning Britain.
Up to now, households have been protected from the huge energy price cap levels by the EPG of £2,500, introduced by the Government in October due to record high energy prices. The EPG kicks in when the price cap is too high but from July, the new lower cap will be under the EPG level, so that's what we will pay.
Read more: Confusion as £400 energy bills support for households comes to an end
Most people hadn't heard of it a couple of years ago, but now the energy price cap is rarely out of the news. Ofgem's Default Tariff Cap - or energy price cap - came into force in January 2019 and was originally introduced to protect people paying Standard Variable Rate (SVR) for their energy if they did not enter into a fixed deal.
The first four caps were great news for families, as it reduced steadily until it reached an all-time low of £1,042 in August 2020. However, as energy prices started to rocket towards the end of September 2021 onwards, it has become the default tariff for most families as new fixed-deals were withdrawn from the market. By winter 2023, it had risen to a shocking £4,279 for direct debit customers, although the EPG has capped household bills at £2,500, regardless of the price cap in force. The cap dropped to £3,280 from April 1, although as it was still higher that the EPG, s households were not affected by the change.
Although the drop should bring some relief to families struggling with the cost of living crisis, remember that the price cap only caps the price of the tariff you will pay for your energy and the standing charges, not your bills. How much you will pay depends upon how much energy you use, where you live, how you pay for energy, and your metering arrangement. That means there's no upper limit to what you actually pay – if you use more energy, you'll pay more, use less and you'll pay less. The figure is derived from 'average usage' of 12,000 kWh pa of gas and 2,900 kWh of electricity.
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Cornwall Insight have predicted the energy price cap to cover October-December will be £1,975, but it's early days yet and this may change. However, most people will pay about as much for their energy in winter 2024 as they did during the winter just gone. This is because households paid the EPG rate of £2,500, plus received an additional £400 off their heating bills in the form of the Energy Bills Support Scheme (EBSS), meaning a total average bill of £2,100 in 2022/23 compared to a predicted bill of £19745 in winter 2023/24 - a difference of only £124 per year. And if predictions are right, families will still be paying around double or more what they did before the energy crisis hit in Autumn 2021.
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