The increasing energy price cap is worrying a lot of people. If you are struggling with energy bills, then you can apply for government initiatives to discount energy bills and thus help you tackle the problem of rising energy bills. So if you are wondering what price cap is and how it affects you, then continue reading.
What Is A Price Cap?
The energy price cap was introduced by Of gem, the market regulator, in 2019. It, also known as unit rate, is the maximum set amount that energy providers are allowed to charge per kWh of electricity and gas every year.
This also includes the maximum daily standing charge, which is the cost of receiving the power to the house. Read more here.
How Does It Work?
The energy price cap is protection from your government for you who rely on your energy supplier for the energy tariffs. They calculate this cost that the suppliers need to apply to tariffs.
They also review it every 6 months to ensure the price you are paying your energy provider is an accurate depiction of the actual cost of providing you with the power. This cost depends upon a variety of factors such as network costs, policy costs, and wholesale costs.
If these factors increase, the price cap will also increase, and if the costs come down as a whole, then the price cap also decreases.
Who Is Affected By The Price Cap Increase?
1) Flexible Tariff Customers
If you are a customer of flexible tariffs, then the increase in the price cap will affect you. You will get a letter or an email to notify you of how the bills will change.
2) Fixed Tariff Customers
If you are on a fixed tariff, then you have protection against fluctuations in the energy market. If you are on a fixed energy tariff for a defined period of time, then you will not have any changes in your energy bills for your contract term and thus will not be affected by the increases in price cap.
However, if you are on a deal that is about to end and needs to be renewed, then you will be moved to a flexible tariff when your contract period ends. You will be able to switch to a fixed tariff when the deal becomes available.
Why Are Fixed Tariffs More Costly Than Price Caps?
The price cap is determined by checking wholesale energy costs over a period of months. But since the last period, the wholesale prices have continued to rise, now being 50 percent more than the previous month.
So when the providers buy energy for their customers by enrolling in a fixed price tariff, it costs significantly higher than the price cap to purchase energy needed for the contract. This is the reason why some energy suppliers are going out of business and closing down, as they have to buy energy upfront for a certain period, like 1-3 years in advance.
So even if the energy costs fluctuate, the agreement is already made about how much energy will be purchased by the suppliers and how much they will charge their customers. So if they have not done this, then sudden increases in wholesale costs will affect their finances.
The bottom line
The ever-fluctuating energy market has started to fluctuate more often recently. The costs of energy are going up with each passing day.
At this time, it’s important you know the technicalities and thus be aware of what you are paying and how you can reduce your bills.