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Martin Lewis Explains The New Energy Price Cap, And What It Means For You

Martin Lewis Explains The New Energy Price Cap, And What It Means For You

Image courtesy of Money Saving Expert

Martin Lewis has updated his 'Must Know' information regarding the price caps on energy, which changed due to the price freeze implemented by new Prime Minister, Liz Truss, last week. I've copied his information into this post as it's incredibly useful information and needs to be shared. The information is written by Martin, and any links will take you to Money Saving Expert, or other external sites as deemed appropriate by Martin.

The information as set out, and written by Martin Lewis

1. On 1 Oct the current price cap will be replaced by a roughly 27% higher 'price guarantee rate' set to last for two years - taking a typical bill from £1,971/yr to £2,500.

I've seen a lot of confusion, so let me start by saying there's NO MAXIMUM ENERGY BILL. Instead, standard tariffs in England, Scotland & Wales (roughly 85% of homes are on these) have a maximum daily fee and cost per energy unit that providers can charge.

The quoted rates many media outlets use are just an illustration of the impact of these caps for someone with typical use (they should state that) so USE MORE, YOU PAY MORE; USE LESS, YOU PAY LESS. I prefer to instead lead on the rough percentage change.

2. The £400 flat reduction for all homes this winter remains - take that into account and the average rise over your current cost is 6.5%

Back in May, the then Chancellor announced a £400 flat payment to reduce every household energy bill this winter. That will still happen. Factor this £400 in, and the price guarantee rise over the current cap is an average 6.5% (£2,100/yr on typical use). Though as the £400 is the same for all, those with low usage could actually see a reduction in the total paid compared to the current rate.

In practice, you will either receive or get your bill reduced by, £66 or £67 each month from Oct 2022 to Mar 2023. See how YOU'LL receive the £400 from your supplier, as it varies by payment type and firm.

However, while the price guarantee rate is promised to last two years, there is no news on whether the £400 payment will be made next winter. If not, then in practice costs for winter 2023/24 will rise.

3. The price guarantee is still a cap on standing charges and unit rates. While using the calc is easiest for most, some like to see actual rates. Here are the average dual-fuel direct debit rates for the new energy price guarantee starting on 1 Oct, how it compares to now, and what was due to happen under the old price cap. The new rates include the announced ending of green levies on energy bills.

  • Electricity Unit rate: 34.0p/kWh (currently 28.3p, was due to be 51.89p) Standing charge: 46.4p/day (currently 45.3p, was due to be 46.4p)

  • Gas Unit rate: 10.3p/kWh (currently 7.4p, was due to be 14.76p) Standing charge: 28.5p/day (currently 27.2p, was due to be 28.5p)

The cap varies by region and how you pay, so for full info see... - Direct debit price cap by region - Prepayment meter & payment in receipt of bills price cap (still to come).

We're waiting to hear these from Ofgem, and will add them in the link when we get them (hopefully Wed afternoon). Prepay is usually 2%-ish more than direct debit, payment in receipt of bills 6%-ish. The fact payment in receipt of bills is higher is why those thinking of "ditching direct debit to just pay what I owe" should be careful. It may benefit you in immediate cash-flow terms, but weight that against the fact in the long-run the rates are higher so you will pay more in total.

4. The new price guarantee is FAR COSTLIER than last winter, but also FAR CHEAPER than it would've been this winter.

Many want to know if this is a good deal, so I've knocked up a table to put it in context, so you can decide for yourself.

Where it says 'prior cap', that's the old price cap regime that the guarantee replaces. Then, prices were based on the huge hikes in wholesale rates (the rises are lower than a couple of weeks ago as European policy announcements have given the market confidence).

The new price guarantee is FAR COSTLIER than last winter, but also FAR CHEAPER than it would've been this winter.

5. On a FIXED deal? What many pay will be reduced - no one's will increase.

Technically the price guarantee for standard tariffs is done as a reduction to the planned October unit rates. The Government has said from 1 Oct the same 4p/kWh gas, and 17p/kWh electricity reduction will apply to many (not all) fixed rates too. That's very roughly in the ballpark of a 30% decrease. My latest reading (the rules aren't finalised) is the reduction will only apply to fixes that will be more expensive than the price guarantee. Energy providers also tell us that their understanding of the Govt's rules (so far) is that higher fixed rates should at most only reduce to the level of the new guarantee. To help though, my BEST GUESS is it means... - Very cheap fix: (eg, 2yr fix from before crisis started). If you'll pay less than the new price guarantee, there's no reduction. - Mid-level fix: (eg, fixed 3-9mths ago at a premium). If your fix is higher than the new price guarantee, it will reduce to the same level as the new price guarantee. - High-rate fix: (eg, fixed very recently at high rate to forestall predicted future huge hikes). Your fixed rate will reduce substantially but a few of these may still be costlier than the price guarantee (see point 6 for your options). As soon as we've firm confirmation, it'll be in our new the price guarantee for fixed prices guide. And a final note, as normal, when a fix ends, you should be automatically moved to the price guarantee rate, unless you choose something different. 6. If you are fixed, no need to do anything until things are firmed up - don't bother calling energy firms - they don't know yet. It looks like the enormous majority of those on fixes will either be automatically paying less than the new price guarantee, or will see their fixed costs reduced to be the same level as it (so effectively are moved to a price guarantee tariff). As I explain above, a very few who fixed very recently may see a big reduction in cost, but still pay slightly more than the price guarantee. - How do I find out how my fix compares to the guarantee rate? You can't yet, energy firms don't have the final details. So don't call - it'll be a pointless phone queue - I'll update you when we know. - If my fix is more expensive than the price guarantee, can I leave exit penalty-free? The Govt said "this is up to firms" BUT I've good news... Today in the energy summit at MSE Towers with the big firms' CEOs, all firms there - Brit Gas, Ovo (SSE), Octopus, EDF, E.on, Shell - agreed to my request that customers who end up on fixes at a higher rate than the price guarantee WILL be allowed to move on to that firm's price guarantee tariff, with no early exit penalties, until at least 15 Nov (some beyond that). Note Scottish Power chooses not to attend the summits. Most will also in time communicate to the small number of people in this position, before that deadline, and offer them the chance to move, once they know (again it's too early now, and you may be charged exit fees before things are firmed up, so - while frustrating - it's probably easiest for most to wait for now). Yet remember most fixes will likely be the same or cheaper than the price guarantee, in which case you won't need to do anything. And of course, we'll compile firm-by-firm info when we get it in the price guarantee for fixed prices guide. PS: Originally the Govt initially told me anyone would be able to leave their fix penalty-free. This was later corrected when news of the fix discount came in. But now I've made a direct agreement with most big firms (for those paying over the guaranteed rate), it should work out.

7. The extra payments for those on many benefits, with disabilities and for pensioners will continue.

As well as the £400 to all households, in May it was announced... - Benefits: Over eight million homes in the UK on means-tested benefits will get a total payment of £650 this year in two lump sums. The first half has been paid, the second half will be paid this autumn (there's no date yet). Full info in £650 payment help. - Disabilities: About six million people across the UK on certain disability benefits will receive an automatic one-off payment of £150 with payments starting on 20 Sept. - Pensioners: Every UK household with someone over state pension age (aged 66 or above) between 19 and 25 Sept 2022 will also get an extra £300 on top of their normal winter fuel payment (usually between £100 and £300), payable in November or December.

There's no news on whether these three extra payments will happen again next year. I think the political reality though is it would be very difficult to keep the cap at this level and not make the payments (one to ask MPs about next year), though I think the £400 payment to all homes is more in the balance.

8. I'm fifty-fifty on whether the Govt will also announce a cut in energy VAT this month.

The guarantee may not be the end of energy changes. I was specifically told energy VAT (charged at 5%) was not within the remit of last week's announcement. The new Chancellor is soon set to do a 'fiscal statement' (Budget-lite), probably on 22 September. Interestingly, take the VAT and the £400 off, and a typical energy bill under the price guarantee would be close to the current cap - so a 'no rise' claim would be possible. That sounds like the type of rabbit a new Chancellor may want to pull out of his hat.

9. You will pay £273/yr even if you use no energy.

You pay for having access to energy even if you don't use it. The daily standing charges rose hugely in April, and will rise a touch in October. If you've both gas and electricity, the average direct debit standing charge is £273/yr before you use owt. I and others have continually pushed back with Ofgem to try and get this changed, but with little success. It's worth noting there are variances in standing charges by region (eg, London is £225/yr, SW England £296/yr) - Ofgem says it is due to the different costs to transport power to where you live.

10. Similar help coming for Northern Ireland (awaiting details).

The Govt has said it is committed to finding rapid solutions to do this, but I'd be surprised to see it in place by 1 October. We don't know exactly what the "equitable support for households in Northern Ireland" will be.

11. For those on LPG and heating oil, the Govt's said there will be discretionary payments at a similar level to help (awaiting details).

Don't hold your breath - I suspect we may not get info on this for a week or two. Of course we'll update you when we know (both here and on social media). Any updates will go in our LPG and heating oil guide.

12. Pay the landlord directly for energy (including students)? Govt says you should benefit from the cap for new businesses (awaiting details).

For those who pay energy bills indirectly - either included in total rent or as a surcharge to a landlord - the cost is likely derived from a business tariff (which until now hasn't been capped). There will now be a six-month cap on business tariffs which the Govt says will help this - though details are still scant. As is info on exactly whether you'll have rights to enforce the discount (especially if the prior expected higher prices are locked into your contract), we await details.

13. On a central heat network, or live in a park home? You should get comparable support (awaiting details).

Though again very scant details on this, including when we'll hear more. We will update you when we know.

14. There may be help if you're going to struggle to pay your bills.

If you're already struggling, or will over the winter, it's always worth talking to your energy firm - be polite and straight with it - and make sure you explain if you're vulnerable. There can also be hardship & debt grants from energy suppliers.

This information is correct as of the 14th of September 2022. All information and links are provided by Martin Lewis from The Money Saving Expert, and all opinions are his, not necessarily those of The Penny Pincher.

Permission has been given by MSE for The Penny Pincher to use Martins information.


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