The new energy price cap: why it’s time to consider switching

*** Being on top of your energy bills can mean £100s more in your bank account each year. This blog explains some of the fundamentals of how the UK energy market works for consumers, and why it might soon be time to shop around for a new deal***

Are you on your provider’s best energy tariff? Now’s a good time to check. Ofgem, the energy regulator, has just raised the energy price cap by £139, which means that more of you could save if you shop around using tools like the one available for free on Zopa’s app. Want to find out more about the price cap is and what it could mean for your money? Read on.

How you pay for your energy

Firstly, it helps to understand exactly what you’re paying for with your energy bill.

It’s essentially two things: the units of gas or electricity themselves and the service charge for your provider. How much your bills end up being will be a combination of these things and, of course, how much energy your household uses in a given time period.

The rate your energy provider charges you can vary, but is usually one of these two options:

Fixed rate tariffs

This fixes the price you pay per unit of energy for a set amount of time, usually one or two years. Each provider will have a selection of different tariffs, depending on what and when you signed up for.

A fixed rate tariff will give you certainty on your energy bills, and even if the wholesale prices of energy increase, they won’t be passed on to you until the end of your fixed term. However, you aren’t completely protected from any changes to your bill, as your provider may change their service charge at any time.

One thing to note is that there is usually an exit fee if you want to finish the deal you’re on early, but there is a 49 day switching window at the end of your deal’s term, where this fee is waived.

These tariffs are where the energy companies compete with each other to win you as a customer, so by shopping around, you could find cheaper deals for your gas and electricity.

Standard variable tariffs

If you haven’t looked at your energy bills for a while, you might find you’re paying your provider’s default tariff, often called the standard variable tariff (SVT). This is the rate you’ll default to if your fixed term tariff expires. It’s also the one you’ll be put on as standard when you move house.

These are often poor-value and much more expensive than fixed-term tariffs. They don’t have an end date, and your unit rates can go up and down at any time, driven by the fluctuating cost of generating your energy. Of course, the flipside is that if wholesale prices decline then your charge could reduce too, though historically any savings have taken a long time to be fed through to consumers.

The energy price cap

This is where the energy price cap comes in. Ofgem sets a limit on how much providers can charge for each unit of electricity or gas to shield customers from some of the fluctuations (though a fixed rate tariff is still likely to be cheaper).

Ofgem reviews the price cap in February and August and sets a new cap in April and October every year. They work out how much it costs a supplier, on average, to provide energy to you and then revise the cap levels to reflect changes in the costs.

If the costs fall, suppliers must cut their prices to the level or below the cap, and pass any savings onto you. That’s when you get the chance to make savings if you shop around for a new deal.

On the other hand, you’ll pay more if the costs rise. Note that the cap ensures that any price increase is justified based on the underlying costs to supply energy – this is to protect you from being unfairly overcharged.

The energy price cap has just risen

From 1st October 2021, the price cap will rise by £139 to £1,277 for the 11million customers on their suppliers' default tariff. If you use a pre-payment meter, bills will also increase by £153. The rise has been blamed on the increase in wholesale prices and the impact of the pandemic.

Keep in mind that this isn’t a cap on your total energy bill, which will vary depending on your usage. So if you use more energy, you’ll end up paying more, and vice versa.

What this means

This means that those of you paying a default tariff will pay more from October, and you should receive a letter from your energy provider in the next month or so informing you of this change.

The price cap doesn’t apply to those on standard variable green energy tariffs that Ofgem has exempted from the cap. This is because these tariffs genuinely support the growth of clean energy. Since it’s more expensive to generate renewable energy, suppliers need to transfer the costs to their customers. If you’ve actively chosen green energy, you’ll likely pay a higher price, but you also know that you’re supporting a worthy cause.

And if you’re on a fixed-term tariff, the cap doesn’t affect you. This is because fixed-term tariffs already protect you from fluctuating energy prices - at least until that fixed term ends.

Should I switch?

While the cap protects customers on default and prepayment tariffs from paying exorbitant prices, it’s not the best way to cut energy bills. Even Ofgem acknowledges that although the cap continues to save consumers up to £100 a year, they can save up to £150 more by switching tariffs.

So if you’re on a default tariff, it’s a good idea to shop around for the best deal and switch your energy supplier. People who have never switched or haven’t switched for a while are likely to make the biggest savings.

This is a good opportunity for you to pick a tariff that works best for you, according to what you value most. Saving money is the obvious one here, but you could also make a decision on which provider to pick based on their environmental credentials or the reviews of their customer service.

How to switch

Using a tool, like the one available in the Zopa app or on a comparison website, you can check the deals available in a few minutes. Once you’ve picked a cheaper deal, the switching process is hassle-free and should take around three weeks to complete. There’ll be no disruption to your energy supply – your new provider will use the same pipes and cables that you currently have. You won’t even need to tell your old supplier about the switch as your new provider will take care of everything for you.

What’s more, you can change your mind if you're unhappy with the deal. Once you’ve signed up, you have a 14-day cooling-off period in which to cancel the switch, without losing any money. Just let your new supplier know.

If you’re on a fixed-term deal, you may have to pay an exit fee if you leave early, so take that into account when you calculate any potential savings. Thanks to Ofgem’s rules, your supplier can’t charge you any fees if you switch within the last 49 days of your fixed-term contract. So use this period to shop around and start your switching journey to avoid any penalty charges.

Download Zopa’s app to see if you could save on your energy bills.

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