Soaring gasoline prices in the UK have created a crisis that threatens various industries, small energy companies and homes.
This rise is due to a variety of factors, including the depletion of gas inventories due to the prolonged winter from 2020 to 2021, increased demand, and decreased exports from Russia.
However, after crisis negotiations with energy industry leaders, Executive Secretary Kwasi Kwaten promised to maintain energy price caps during the winter to protect “millions of customers.”
He told the House of Commons:
But how does the price cap work and what does it mean for UK households?
How does the energy price cap work?
Energy price caps set by industry regulator Ofgem help control UK gas and electricity costs.
The cap limits the unit and recurring charges that a supplier can charge against the default rate. It is reviewed twice a year.
It is based on the average customer who uses a “medium” amount of energy each year. However, this number is only a guide for the average user.
Also, the cap applies only to customers who are using standard variable rates (usually the supplier’s most expensive rates). If you’ve never switched energy companies, or if your last switch was more than a year ago, you’re probably defaulting to standard or default rates.
What is the current limit?
In 2021, the cap level rose twice for the first time in the same year and is now at the highest level ever.
The energy price cap has risen to £ 1,138 from April 1st. This is a £ 96 increase for “medium” energy users. Starting October 1, there will be an additional 12% increase, raising the cap to £ 1,277. This affects about 11 million households.
This increase is mainly due to soaring wholesale energy prices. In other words, Ofgem allows businesses to charge higher charges.
If you are also using a prepaid meter (or a “pay-as-you-go” meter), there is also a significant increase. A £ 87 price increase will be set in April, the cap will rise to £ 1,156 and will rise again to £ 1,309 from October 1.
How does it affect my invoice?
The cap protects the cost of the unit, not the invoice, and is not the maximum amount a customer paying for such a fee for their annual energy bill. If you use more gas and electricity than “medium” users, you will pay more for it.
However, Ofgem estimates that households can save around £ 75 and £ 100 a year as a result of the cap.
People looking for fixed tariff transactions are already protected from rising prices.
Why is there an upper limit
Price caps were introduced in January 2019 to prevent customers from paying excessively high prices.
This is just the most expensive price cap and protects people who don’t know or are uncertain how to switch to a new transaction or provider to save money.
According to MoneySuperMarket, the cheapest price on the market last month was about £ 200 lower than the current price cap level.
How does this affect energy companies?
The cap protects consumers from sudden price hikes, which means that suppliers cannot pass on rising wholesale gas prices to their customers.
Five small energy companies in the UK are already out of business as a result of hiking, and there are concerns that many other companies may follow suit this winter.
However, Mr. Quarten emphasized that the government “does not bail out businesses and there is no reward for failure.”
If the supplier fails, Ofgem switches the customer to a “last resort supplier” and transfers the credit.
The old rates are over and the new supplier signs a special “deemed” contract. However, this can be more costly as energy companies may be forced to purchase additional wholesale energy with urgent notices to supply new customers.