How does the energy price cap work?

Article posted

14th Sep 2022

Read time

6-11 min read

Author

Mollie Pinnington

 

Since the new Prime Minister's announcement on the energy price cap last week, we have seen a lot of uncertainty between the government and the energy regulator Ofgem for what this is going to look like for businesses.

Unfortunately, due to the sad passing of the Queen, Parliament has been in recession and therefore any details on how the "energy price guarantee" is going to work have been limited. Home energy bills in England, Scotland and Wales are likely to be capped at £2,500 a year, according to the government.

A cap level for business energy tariffs has not been released as it is likely details are still being worked out. The government are so far still on track for the domestic  EPG to be available from the 1st of October 2022. Businesses, on the other hand, have been warned they could have to wait longer than households to start receiving support with their energy bills. 

Businesses could now have to wait until November as delays with the £150bn scheme, means that the government cannot roll out support for businesses just yet. Given this government, officials are currently saying that support will still be given for October energy bills, through backdating if needed. There will be further updates on this from the government next week, once the country is over the national mourning period. 

 

Domestic customers

Although there has not been much of an update on the business EPG, here is what has been set out for domestic customers. Households of a variable tariff can expect to see bills rise when it comes to October. This will be less than the original price cap that was going to be set out by Ofgem.

Those on fixed tariffs will also receive support. If your fixed rate is higher due to recent energy prices, then the government plan to reduce by 4.2p/kWh for gas and 17p/kWh for electricity.

Although this will vary when it comes to business rates, this could be an indication of the support that your business could see.

 

What is a price cap?

The energy price cap is protection for domestic and business energy customers. This ensures that your energy supplier cannot charge you over a certain amount for your gas and electricity. For businesses, this will cap how much you pay for each unit (kWh) of gas and electricity.

 

Why is there a price cap?

For domestic customers, there has been a price cap for a long time to ensure customers on a default tariff do not get stuck paying unaffordable prices. Therefore, whether you are on default or standard variable tariff you will get fair prices.

Recently due to global market conditions, we have seen a significant increase in wholesale energy prices. this has put a big strain on households and businesses, leading to families facing fuel poverty and business having to close their doors.

This has led the government to step in to introduce a new energy price guarantee that offers support for both businesses and households.

 

How is the price cap level set?

There are varied aspects that are considered when it comes to setting a price cap such as:

  • Wholesale energy prices- this is how much a supplier has to pay for each unit of gas and electricity.
  • Policy costs- this is things such as green levies or other schemes usually put in to encourage people to be more environmentally friendly with their energy choices.
  • network- this is usually what you pay a standing charge for. This covers the cost of maintaining your energy supply from the grid to your home.
  • operating- this is the cost suppliers face to supply billing and metering services.

These factors are considered to then produce a price that is fair for consumers but also ensures suppliers don't collapse, hence why the price cap is usually reviewed so often.

 

What if your business is still struggling after the six-month cap?

As we mentioned above the government have only set out the energy price guaranteed to aid businesses up until the 31st of March 2023. However, if your business is still struggling after this date the government have said that there will be continued extra support for the sectors that need it after the price cap.

So far, we still do not know what type of businesses this includes or what support will be available, however, we will be updating customers as soon as we know more.

 

The long-term energy plans

Cost reductions

Currently, the UK are initiating an energy task force that will collaborate with suppliers to negotiate better energy prices in the long run. There will also be a clear review of energy regulation to create a more affordable system long-term.

Supply increase

to ensure that the UK does not find itself in an energy crisis again the government are planning to accelerate domestic energy supplies. this will ensure that the UK does not suffer as much from global changes in the energy market.

This includes an uplift in shale gas production, which could see a start in gas production in the next year. There is planning to accelerate sources from the North Sea oil and gas. The government are also planning to put reforms on the energy market to continue to regulate the prices of new energy deals.

 

What happens to my energy bills after the price cap?

As we have mentioned the price cap for businesses is only going to last for 6 months. This means by June next year you could be back on a fixed term or default energy tariff again, depending on what level of support your business requires. However, there is plenty of ways over the next six months your business can avoid high fixed prices.

Unfortunately, we can't change the price of wholesale energy, which could still be high after the price cap. However, over the next six months, your business could be reducing your energy usage to ensure lower energy prices when the price cap is over.

 

How can I reduce usage?

Once the price cap is removed, avoid high energy prices by taking the correct measures to reduce your usage. Over the next six months, our energy reduction and efficiency plans could ensure your business can mitigate potential market increases. By working with your business, we can develop a pathway to ensure your business is in the best possible position going forward. 

If you are interested or want to know more about our plans or services get in touch today.