Families are confused about the energy price cap - here are the 6 main need-to-knows

Since autumn 2021, families all over have been impacted by the energy crisis. The wholesale price of gas skyrocketed, which meant our energy bills did too. 

As so many families were concerned about how much their energy bills were going to cost, the government organised a £400 energy bill rebate, introduced the Energy Price Guarantee and made cost of living support payments to those most vulnerable to rising prices to help.

But now wholesale energy prices are dropping, the Energy Price Guarantee will end and from July, the energy price cap will set the maximum price we pay for our energy. The official level of the new cap is to be announced this week. 

There has been so much change in the amount of support being offered, who gets it and how long certain schemes will be in place for, and at what level, that families have been left completely flummoxed about what's going on.

Let's take a look at the common confusions and I'll explain what you need to know.

1. Whether the cap is a maximum you will pay or not

When a new energy price cap is announced, it's always presented as an annual figure. Right now, our bills are capped using the Energy Price Guarantee, which is £2,500. This can be confusing and lots of families think that this means that their annual energy bills won't cost more than £2,500, but this not the case. 

That annual figure is actually an average cost for a typical house, based on typical use. If you use less energy than the typical household, your bills will be less than the cap. If you use more energy than the typical household, your bills will be higher. 

While the cap is expressed as an annual figure, the cap is actually on the underlying price you pay per unit of energy that you use. 

2. Whether there is a difference between the price cap and the price guarantee

Families can be completely forgiven for being confused about the difference between the price cap and the price guarantee - they both set caps on the price we pay for our energy, but there are a couple of major differences. 

The energy price cap, which has been in place since January 2019, is set my the energy regulator Ofgem, is based on the wholesale price of gas, and is normally used to dictate how much those who aren't on fixed price tariffs pay for their energy. It used to be reviewed every six months, but as of 2022, it's now reviewed every three months instead. Right now, the energy price cap is £3,280. 

But the energy price cap got so high during the energy crisis, that it was completely unaffordable. So the government stepped in and introduced a new, temporary cap, the price guarantee, at a level of £2,500. 

The price guarantee will be used to calculate energy bills until the end of June. From July, the energy price cap is predicted to drop below £2,500, and so the cap, rather than the guarantee, will be used to calculate our bills instead. 

3. Whether the cap changes throughout the year or not

The energy price cap changes throughout the year, so that it can accurately reflect the wholesale price of energy (that's the price our energy suppliers pay to buy the energy they then sell to us).

For July-September, it is predicted to be £2,053, then it will change again in October, then once again in January. 

That doesn't mean you'll pay £2,053 for the energy you use between July and September. It means, that if you paid that period's capped unit rates (the price per kilowatt hour of energy you use) for a year, a typical home's annual bill would be £2,053. 

4. Whether the cap applies to you or not

Unless you are on a fixed-rate tariff, where the price you pay per unit of energy you use is locked in for the duration of your tariff, usually 12 months, the price cap will be used to calculate your energy bills. This is regardless of whether you have a standard or prepayment meter. 

Those with prepayment meters have historically always paid more, but this has long been thought to be unfair. So from July, prepayment prices will be brought in line with direct debit prices. If you have a prepayment meter and are struggling to pay for your energy, see if you qualify for free gas and electric vouchers. 

5. Whether you should fix your energy prices

Right now, any fixed price deals being offered are more expensive than what the energy price cap is predicted to drop to, so families are better placed staying on their supplier's variable tariff and being protected by the cap. 

But when the cap drops and there is a bit more certainty around wholesale prices stabilising, energy suppliers might start offering fixed price deals again. Whether you should fix your energy prices will depend on weighing up how much you can save by fixing, and whether you'll still save if the price cap drops again when it is next reviewed. 

6. Whether the cap will drop to where it was before the energy crisis

Lots of people will be glad to see the energy price cap drop from July, but sadly it's not dropping to the levels we saw before the energy crisis. Before the prices shot up, families were paying around £1,200 per year for their energy. The July energy price cap is predicted to be around £2,050, which is still significantly more expensive. Predictions suggest the cap will stay near this level for the rest of the year.

Help is available if you can't pay your energy bills - speak to your energy provider in the first instance.