Most people hadn't heard of it a couple of years ago, but now the energy price cap is rarely out of the news - and Thursday, May 25 is the date when we will find out what's in store for our bills for the three months from July 1.
After nearly two years of rises, it looks likely that the price that households pay for energy will finally drop to around £2055 a year for the average family, according to final predictions from energy experts Cornwall Insight. This will bring the cap below the Government's current Energy Price Guarantee of £2,500.
The predicted drop represents a 18% reduction in energy bills for customers who pay by direct debit and comes just days after energy regulator Ofgem confirmed that the price households pay for energy would "drop considerably" from July.
Read more: Energy bills could rise £30 for households to cover cost of customers who avoid paying
Here's all you need to know before this week's annoucement:
What is the price cap?
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towards the end of September 2021 onwards, it has become the default tariff for most families as new fixed-deals were withdrawn from the market.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. In August 2022, Ofgem announced the cap would be updated on a quarterly basis rather than every six months to reflect changes in the cost of supplying energy more quickly.
How is the price cap calculated?
The energy price cap is calculated using the average gas and electric usage statistics per year in the United Kingdom, which are 12,000 kWh pa of gas and 2,900 kWh pa of electricity. The largest cost is wholesale energy, which accounts for about 41% of a typical bill for a tariff priced at the maximum allowed under the current price cap. Other elements include things such as the costs of maintaining the pipes and wires or the operating costs suppliers face for billing customers and providing metering services. Ofgem can also add on any unexpected costs, for example, during the pandemic it included a £24 per customer allowance in the cap to cover the economic fallout.
What is the EPG?
Customers have typically been paying less than Ofgem's current price cap – set in April – of £3,280 for direct debit customers as the Government's separate Energy Price Guarantee (EPG) capped the typical household bill at £2,500 a year. The EPG came into effect on October October 2022. This reduces the unit cost of electricity and gas so that households with typical energy use pay around £2,500.
Does the fall mean cheaper energy?
As the predicted fall in the Ofgem energy price cap will bring the rate to under the EPG rate of £2,500, households will feel the benefit of a reduction in their costs - if the predictions are correct.
Is the price cap the maximum I will pay?
No. The price cap caps the price of the tariff you will pay for your energy and the standing charges. Your actual bills will depend on 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.
Will I be able to afford heating this winter?
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, although this is lower than last Octobers £3,549 (although the EPG capped this at £2,500) it's still much higher than October 2021's cap of £1,277.
Should I reduce my direct debit?
As prices fall, your energy supplier will probably reset your direct debit to take account of lower bills. But remember, direct debits work by smoothing out the variations in your bills over the whole year., so you will pay more in summer to build up a credit to cover your winter use.
Why is my direct debit higher than the cost of my bills?
Your energy bill can vary a lot between summer usage, when you are unlikely to have the heating on and won't use as many lights, and winter usage. Paying by direct debit means you pay the same amount every month, regardless of the amount used, as long as your total usage stays within the original estimate prepared by your energy company.
Why should I pay for energy I am not using?
The plan is you pay for more energy than you are using during the warmer months to build up credit to allow you to use more than you pay for in winter months. If your estimate has been correct, families paying by direct debit should be starting to build up credit now ready for this winter. Remember, you would gain in the short term by just paying for what you use in the summer, but you could come to regret this in the winter, when you could find the bigger bills a real challenge unless you budget for them yourself.
Should I ask for a refund for credit?
If your direct debit has been set accurately you should be starting to build up a little credit from around now. But if you're heavily and disproportionately in credit after winter, you can get at least some of it back. According to regulator Ofgem, suppliers must refund accumulated credit, though it doesn't say how much it thinks is fair.
Before asking for credit back, make sure it's not sitting on your account ready to pay a quarterly bill due which will wipe the 'credit' out and make sure that your bills are accurate by giving meter readings if you haven't got a smart meter. If you have been paying estimated bills, you may find the credit is eaten up when your true usage is calculated.
When will the next energy price cap be set?
The next energy price cap will be set in August, and will cover the period October 1 - December 31.
Should I cancel my direct debit and pay for my bills when I get them?
While there is a logic to just paying for the energy you use, experts have urged people to think twice before following advice on social media which could plunge them into another winter of misery. Last summer, Facebook and Twitter were awash with self-styled experts advising householders to just pay for what they used, as families who had not given energy much thought until the cost of living crisis turned to social media to try to understand why their energy direct debit payment was higher than the amount they were using. The advice works in the summer, when bills are generally lower, but could be catastrophic in the winter with no direct debit credit to rely on.
What happens if I cancel my direct debit?
Most energy providers give a discount if you pay by direct debit which you could lose if you cancel and pay by credit or debit card when your bill comes in. And when you cancel, the entire balance on your account will be payable. So if you have built up debt, this will all be added to your next bill, with immediate payment demanded.
Why are energy costs so high?
The surge in the price of wholesale gas caused prices to rise. It was also a key driver in the cost-of-living crisis, helping push inflation into double digits. UK households have the added disadvantage of having around 85% of homes heated by gas boilers and around 40% of our electricity is generated by gas-fired power plants.
Will they continue to fall?
Cornwall Insight has predicted a fall to £1,975 when the price cap is set in July, then a slight rise to £2,045 in October' s cap.
Is now a good time to fix my bills?
The predicted drop could mean that for the first time in almost two years, households could see the return of competitive fixed-price energy tariffs. Ovo Energy has already offered existing customers a new one-year fixed deal priced at £2,275 a year based on typical household use - and could be the first of many. Ofgem is warning households to think about the pitfalls before rushing to fix their energy rates when deals start to come back onto the market. The Think Before You Fix social media campaign is urging people to check if fixed-rate energy tariffs are right for their circumstances, especially as better deals may come on to the market if, as energy experts predict, prices continue to fall.
Will we get another £67 each month to help with winter bills?
The £400 energy bill support scheme (EBSS), which was paid monthly to nearly all households this winter, ended in March, and there's no indication it will be repeated this winter.
How do I know if I'm on a price-capped tariff?
If you've never switched your energy tariff, or have come off a fixed-rate deal and not re-fixed, chances are you will be on a default tariff. You will have also been switched for a default tariff if you were with a supplier that has gone bust and you have been switched to a new supplier under Ofgem's supplier of last resort scheme. Families who have moved home will also have lost their fixed deals when they left their old property.
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Does the price cap change depending on how I pay?
Yes it does. Families paying their bills by either cash, cheque or quarterly direct debit will pay more than the headline rate, which is the cap for customers paying by monthly direct debit.
How long will energy prices by capped for?
When it was first introduced, the cap was set to remain in place until at least the end of 2020, although the Government has the option to extend it on an annual basis until 2023 at the latest. The Government has announced its intention to allow the price cap to be extended beyond 2023 if required.
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