What is the energy price cap and how does it work?
MILLIONS of households will see their annual energy bills fall by over £420 this summer after a new energy price cap was confirmed.
The regulator Ofgem has announced the cap will be set at an annual level of £2,074 for a dual fuel household paying by direct debit, based on typical use.
But what is the energy price cap, and why does it impact what I pay for my gas and electricity?
Under the energy price guarantee, households currently pay an average of £2,500 a year for their energy bills.
It is a Government discount that was applied to ensure families did not have to pay too much for their energy.
Without it, the average household would be paying £3,280 a year.
But the scheme is being dropped from July and the new, and lower, energy price cap will come into force.
What is the energy price cap?
The price cap on energy bills was introduced in January 2019 as a way to prevent households being ripped off by their energy suppliers.
It is currently £3,280 a year on average.
But households only pay £2,500 a year on average, as the price is overruled by the energy price guarantee, which is cheaper.
However, this will fall to £2,074 from July when the price guarantee finishes and the energy price cap comes into force.
Because the price cap changes every three months, it means prices could go up or down from October.
It affects around 29million customers on default or variable tariffs, according to the regulator Ofgem.
The cap is calculated based on the wholesale price of gas and electricity.
It also includes allowances for tax, charges paid to the energy networks, green levies and social payments.
The reason it has gone up so much in the last 18 months is partly due to Russia limiting its gas supply to Europe.
But there’s also been high demand from Asia which has seen prices surge.
The UK also imports more than two-thirds of its gas which is subject to global price swings making prices more volatile and likely to rise.
How does the energy price cap work?
The energy price cap works by setting a limit on the maximum amount suppliers can charge for each unit of gas and electricity.
That means despite the energy price cap amount being £2,074 from July, you might pay more or less than this every year, depending on your usage.
Ofgem also sets a maximum daily standing charge which is what households have to pay in order to have their home connected to the National Grid.
The energy price cap only applies to providers’ standard and default tariffs.
This means if you’re on a fixed-term energy deal, the cap doesn’t apply to you.