UK Electricity Prices Cap - a deep dive

UK Electricity Prices Cap - a deep dive
6th October 2022


“Hope is important because it can make the present moment less difficult to bear. If we believe that tomorrow will be better, we can bear a hardship today” -Thich Nhat Hanh

Energy costs have risen significantly in recent months, putting a strain on households’ budgets. There are both advantages and disadvantages to having a price cap. A price cap would benefit those on low incomes who are the most vulnerable and those who would benefit most from an energy price cap because they are the most likely to pay high tariffs and go through financial burdens.

In addition, low-income consumers tend to spend the least, but the standing charge still forms a significant proportion of their overall bill, meaning they pay the highest overall rate for the energy they consume.

The price cap is advantageous because it restricts the rates suppliers can charge for default tariffs, including the standing charge of each kWh of electricity and gas (units your bills are estimated from). However, your total bill will not be capped and will vary depending on the energy used.

The energy price cap can also harm the economy in the long run as the government will have to fill the gap by getting revenue in other forms, such as taxes on income. The government has said that the total cost of this scheme will be known in September, but it has been estimated that the amount could be between £130bn and £150bn. The government plans to pay for this by increasing borrowing and raising money through selling financial products called bonds to global investors- such as pension funds. However, the bonds will need to be paid back, generally after many years, with added interest. This means taxpayers will fail to pay more than the initial amount raised.

According to the Office of National Statistics, 66% of adults in the UK revealed that there had been a rise in their cost of living, with higher energy costs being one of the main contributors. Of the adults who disclosed experiencing an increased cost of living to the Opinions and Lifestyle in January 2022, 79% reported higher gas and electricity bills being the culprits.

Energy costs are expected to increase further as on 26th August, Ofgem revealed that the energy cap would increase to £3,549 per year for dual fuel for a typical household from 1st October 2022.

However, Lizz Truss announced that households would not pay more than £2,500 towards energy bills as they would be capped for average households until October 2024.

The energy price will be substituted by an “energy price guarantee” while the energy cap is in place, with the government subsidising energy suppliers to cover the rest with wholesale prices from 1st October.

The strategy means that the anticipated leap in energy costs will not soar from £1,971 to £3,549. This would save approximately £1,000 this year because of the energy cap, which means that although there will still be an increase in October 2022, it will not be as much as initially anticipated.

However, the amount households save next year could fall, as the one-off payment of £400 introduced earlier in the year by Former Chancellor Rishi Sunak has not been extended.

Every business and other non-domestic properties, such as schools and charities, will also have support in place for six months from October; a review will be undertaken in 3 months to match subsequent payments with those struggling the most.

The previous price cap did not cover businesses dealing with mounting bills five or six times. However, under the new plan, the government will support businesses by intervening to maintain wholesale prices down.

Moreover, the Default Tariff was enacted on 1st January 2019 and is a short-term cap on standard adjustable and fixed-term default tariffs. Ofgem announced in August 2022 that the Default Tariff Cap would be updated quarterly instead of every six months. Ofgem has changed the default tariff to comply with licence requirements and will update it four times a year to ensure the Default Tariff Cap reflects adjustments in the cost of supplying energy more rapidly.

Energy Bills Support Scheme

The government revealed that energy bills support scheme would be launched to help families this winter with a non-repayable £400 discount to those eligible to go towards their energy bills during 2022-2023.

Who is eligible

Households in England, Scotland and Wales, are entitled to a discount if they fit the eligibility criteria.

Even if your circumstance change, you could still be eligible for a discount if:

  • You adjust your payment method

  • You adjust your tariff

  • You decide to change your electricity provider

  • Your energy provider goes bust

  • You move home

  • You have arrears on electricity bill payments

How will you receive the discount?

In most cases, you will not have to lift a finger as you will not have to apply for a discount and will not need to contact your energy provider.

The discount will be active and applied to your monthly electricity bill from October 2022 for six months. You will receive:

  • £66 in October and November

  • £67 in December, January, February, and March

The discount will be given monthly; this is also applicable to those who pay quarterly or use a payment card.

Users of the traditional prepayment meter will get these amounts through vouchers that need to be redeemed.

Your electricity provider should give more details on the scheme before it commences. Contact your energy provider if you have not received your first payment by the end of October 2022.

Direct Debit Customers:

Customers who pay through direct debit will automatically receive a discount; this may be through a reduction in your monthly fee or a refund after you have paid your monthly energy charge.

Customers who pay by standard credit or payment card

If you pay through a standard or payment card, your discount is automatically applied to your account through credit during the first week of every month. The credit will show the same as it would if you had made a payment.

Customers who have smart prepayment meters

If you have a smart prepayment meter, your discount will be credited straight to your prepayment meter during the first week of each month

If you have debt with your energy provider, you may be eligible for a grant to help pay your outstanding bill

Support may include:

  • £650 Cost of living payment for households on means-tested benefits (Gov.UK)

  • £300 Pensioner cost of living payment, which would be paid with the Winter Fuel payment

  • £150 Disability cost of living payment for those in receipt of certain disability benefits

  • There is also a Household Support fund available with local councils


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Lizz Truss may have introduced a temporary price cap until October 2024, but this is a temporary solution, and a more permanent solution will need to be reached; otherwise, energy prices will continue to soar at alarming prices. Furthermore, at any point, Lizz could make a U-turn and terminate the cap before October 2024. Plus, 2,500 per year is still quite a high price for typical households to pay, and a rise in October this year, although not as steep as initially thought, is still in the works. Will Lizz Truss’s strategy be enough for households to weather the storm?

Time will reveal what is next on the horizon for the energy crisis.