When was the first energy price cap?
The first price cap for default energy tariffs, or standard variable tariffs (SVTs) as they’re often referred to, was established on 1 January 2019 by Ofgem - the Office of Gas and Electricity Markets.
Since 1 April 2017, there has also been a price cap protecting customers on prepayment meter tariffs, which covers around 4 million energy consumers.
Why was the energy price cap invented?
The aim of establishing the default tariff price cap was to provide protection to some 11 million energy customers across the UK, ensuring they paid a fair price for the energy they used to power their homes.
The price cap is set so energy suppliers can’t charge their customers whatever they want per kWh of energy they use, while also reflecting on the wholesale energy market so suppliers aren’t buying energy at a more expensive rate than they’re selling at.
How often is the price cap changed?
The price cap changes twice a year, and we usually hear what it’s going to change to in February and August - we can only speculate what it’s going to be up until these points. However, the energy price cap changes don’t actually take effect in the months we hear whether they’re rising or falling, this happens around two months later.
For example, the price cap we hear about in August won’t take effect until October, and the one we hear about in February won’t take effect until April.
The history of the energy price cap
From the day it was first set in January 2019, it’s fair to say the energy price cap has seen its fair amount of fluctuation. Let’s take a look at each time the cap was set over the last few years.
When the price cap was first established suppliers could set the rate of their standard variable tariffs as they wished. The average annual price of an SVT was set to £1,137, which worked out at £94.75 on average per month. However, this was then adjusted in February 2019 to £1,254 - a monthly SVT average of £104.50.
The next price cap announcement saw the annual SVT average drop to £1,179 with a monthly average cost of £98.25.
It dropped again in February 2020 to £1,162 and a monthly average of £96.83.
Ofgem changes average usage
Between the February and August price cap announcements, Ofgem changed how they calculated the price cap by lowering the household average energy usage of electricity to 2,900kWh from 3,100kWh.
Due to wholesale energy prices plummeting from lack of demand during the first Covid-19 lockdown, the price cap dropped to its lowest ever recorded price of £1,042 with a monthly average of £86.83.
As lockdown began to ease and people started to venture out, wholesale energy prices started to climb, which caused the price cap announcement of February 2021 to increase by £96 to £1,138 and a monthly average of £94.83.
With wholesale prices climbing still, the price cap rose once again to £1,277 with a monthly SVT average of £139 - the highest price cap to date.
How is the energy price cap calculated?
The energy price cap is calculated using the average gas and electric usage statistics per annum in the United Kingdom, which are 12,000 kWh pa of gas and 2,900 kWh pa of electricity.
Will the energy price cap always be a thing?
The only thing we know is that Ofgem’s energy price cap isn’t indefinite and will end at some point, but it’s speculated the cap will continue to protect energy customers on both standard variable tariffs and prepayment meter tariffs until 2024.
Energy price cap need-to-knows
#1 The energy price cap only affects SVTs and prepayment tariffs
The energy price cap will only affect you if you’re on a default tariff (SVT) or prepayment meter tariff.
Why? Because both of these tariffs feature variable energy rates.
#2 Protect yourself with a fixed tariff
If a high price cap is announced, you’ll have time to switch to a fixed energy deal to protect yourself from the inevitable rising of default tariffs before the cap takes effect.
#3 It’s not a cap on your bill
The price cap figure isn’t a fix on your bill, nor is it a cap on how much your energy will cost you. It's an average bill cost when using average energy usage figures with the new price per kWh of energy.
For example, if the price cap was £1,138, that’s because the average house in the UK using 12,000 kWh pa of gas and 2,900 kWh will spend £1,138 with the new price-per-unit of energy set by Ofgem.
#4 Switching is still cheaper
Never rely on the price cap falling to save you money on your energy bills. Switching to a cheaper energy tariff with a different supplier still remains the quickest and most efficient way to shave a considerable amount of money off your annual energy bills.