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Sky-High Energy Bills: New Cap Brings Slight Relief for UK Households
The price cap set by energy regulator Ofgem has become a crucial number for British households who are struggling with skyrocketing bills. However, there is some good news – starting from Sunday, the average annual dual-fuel bill in Britain will drop below £2,000 for the first time since April 2022, thanks to a new, lower cap taking effect.
Unfortunately, there won’t be a repeat of last year’s £400 universal bill subsidy, and the End Fuel Poverty Coalition warns that people will still feel the pain of high energy bills this winter due to the ongoing cost of living crisis.
How is the Cap Changing?
On October 1st, the price cap set by Ofgem for households in England, Wales, and Scotland will be reduced to £1,834 per year for a typical annual dual-fuel energy bill, down from the previous figure of £2,074. The reduction is largely due to a change in how the regulator calculates average household energy consumption. Under the old methodology, the cap would only decrease by 7% (£151), resulting in an equivalent of £1,923 per year. For customers with prepay meters or who pay by cash or cheque, the figures are slightly higher at £1,949 and £2,052, respectively.
The new calculation assumes that households now use 7% less electricity and 4% less gas, reflecting the impact of the cost of living crisis. Previously, Ofgem had provided a headline figure of £1,923 per year using the old methodology for comparison purposes. Going forward, only the new system will be used.
Will I Pay No More Than £1,834 per Year?
Not necessarily. £1,834 is the amount a “typical” household would pay if the new rate were applied for a full year. Actual bills may be higher or lower as they are based on individual energy usage rather than average consumption. Furthermore, the Ofgem cap changes every three months. A leading forecaster, Cornwall Insight, predicts that the rate will climb to £1,898 per year for the typical home from January.
How Does the Cap Work?
The cap was introduced in 2019 to protect customers on their supplier’s standard variable or “default” tariff and prevent them from being overcharged for sticking with the same supplier year after year. However, due to the energy crisis, about 30 suppliers went bankrupt and cheap fixed deals and the switching market disappeared. As a result, approximately 29 million households now rely on the default tariff, which is determined by the cap.
Under the cap, suppliers are restricted in how much they can charge for each unit of energy (kilowatt hour) and also for standing charges (flat daily fees for a gas and electricity connection). Currently, customers paying by direct debit or prepayment meters are charged a maximum of 30p per kilowatt hour for electricity and 8p per kilowatt hour for gas. From October 1st, these rates will decrease to 27p and 7p, respectively.
Although falling unit costs are good news for households, the cost of each unit of energy is still approximately double what it was two years ago. Furthermore, standing charges have increased by 8% for gas and a staggering 119% for electricity, adding up to just over £300 for the average billpayer.
Does the Cap Protect People on Prepayment Meters?
Yes, the energy costs of around 4 million domestic customers with prepayment meters who pay upfront for gas or electricity using an app or by visiting a shop are protected by the cap. However, the cap is slightly higher for these customers compared to those paying by direct debit.
Previously, customers with prepayment meters faced a higher “prepayment premium” until the government intervened to end it. The government is currently funding a reduction in the premium until April 2024, and Ofgem is working on a plan to permanently eliminate it after that.
Why Are Heat Network Customers Excluded?
Customers living in flats with communal heating systems are supplied by a single supplier that procures energy on their behalf. As a result, their supply is considered commercial rather than domestic and is not subject to the price cap.
Heat network operators, such as local councils, can apply for help with costs through the government’s energy bill discount scheme. Any savings secured by the supplier should be passed on to consumers, and customers should be notified about how these savings will be applied. If customers haven’t received notice, they can complain and contact the energy ombudsman if necessary. A template letter for complaints is available on Gov.uk.
What Help is Available?
Unfortunately, there is less help available this year. The £400 energy support given to all households in the past will not be repeated, and instead, the government is providing cost of living payments to around 8 million vulnerable households. This includes a £900 payment for those on means-tested benefits, £300 for pensioners, and £150 for disabled people.
If you’re facing financial difficulties, it’s important to contact your energy supplier as soon as possible. Under Ofgem rules, suppliers are required to work with customers to agree on a payment plan that is affordable. Customers who can’t afford to top up their prepayment meters may be eligible for temporary credit from their supplier or can explore options such as energy grants.
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