Understanding Ofgem’s new prepayment energy price cap

by Tim Deakin Domestic Energy News

Understanding Ofgem’s new prepayment energy price cap

Ofgem has announced a new prepayment energy price cap, designed to make sure households are paying a fair price for their gas and electricity. But what exactly is the price cap, and what does it mean for your bills? We’re going to answer some of the most common questions surrounding this new development.

What is the prepayment price cap?

To put it simply, the prepayment price cap limits how much you can be charged per kilowatt-hour (kWh) of electricity or gas. Suppliers can’t set their prices above the tariff cap — they must be set either level to it or below it.

Ofgem sets the level to reflect the estimate of how much it costs to supply your energy, in order to protect you from being overcharged.

Why was it introduced?

The prepayment cap was devised to prevent those currently on prepay energy tariffs from paying too much. Research by the Competition and Markets Authority (CMA) found that prepay customers generally have fewer tariff choices and pay disproportionately more than customers who pay by other means such as direct debit. The research also found that prepayment customers are more likely to find themselves in vulnerable circumstances like debt when it comes to their energy bills.

How long will it last?

The prepayment price cap will be in place until at least 2020. By then, it is expected that smart meters will be much more commonplace. This, combined with other advances in the energy industry, is expected to make it much easier to find a better deal and measure their energy usage effectively.

How is the level set?

The level of the prepayment price cap is updated every six months, in April and October. The methodology behind setting the cap is developed by the CMA, and takes several factors into account including: the benchmark price cap figure; the wholesale energy prices for the previous 6 months; and inflation from the Consumer Price Index (CPI).

Do I need to apply for it?

No, your supplier must automatically ensure that bills fall on or below the level set out by Ofgem’s prepayment price cap.

Will my bills go down?

If you’re on a poor value deal, then there is a good chance that your bills could go down as suppliers must cut their prices to meet with the criteria of the cap. If costs fall then the cap will ensure that the savings are passed on by your supplier. Similarly, if costs rise then the cap ensures that any price rise is justified based on what it costs to supply energy to you.

Will my bills go up?

In some situations your bills could go up under the cap. For example, if the cost of getting gas and electricity to your home goes up and depending on how much energy you use. It is also possible that some suppliers will choose to increase their tariffs to bring them closer to the price cap.

However, the cap ensures that any price rises are “fair” as determined by the CMA, and suppliers cannot charge you anything above the amount set by the cap.

How can I reduce my bills?

The prepayment price cap offers some peace of mind that customers on this type of tariff are paying a fair price for energy. However, it’s important to still make a regular habit of shopping around for the best deal to see if you can save more by choosing a different tariff.

More than half of UK households have never switched or have only switched prepayment deal once, meaning you’re unlikely to be getting the best price for your energy. Start hunting for better tariffs today to lower your energy bills.

Need help switching your supplier? Let The Energy Check find the best tariff for you. Click here to start comparing providers, or give us a call on 0800 031 48 00.

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