What is the difference between the Energy Price Cap and the Energy Price Guarantee?

It’s very easy to be confused as to the significance of today’s Energy Price Cap announcement from Ofgem, so let’s simplify things so we know exactly how today’s price cap news affects us as consumers. Ofgem announced today that the new Energy Price Cap is to be priced at £3280 for the average household from April 1st 2023. Whilst this is a reduction of around £1,000 from the current price cap, bills are still expected to rise by around 20%, so why is that?

Firstly let’s understand the difference between the two terms:

Energy price Cap

The Energy Price Cap was first introduced by Ofgem to ensure that consumers were protected against expensive standard variable tariffs. Households would default onto the standard variable tariff or ‘SVT’ if their fixed tariff came to an end, or if they had never switched or tried to find a cheaper energy supplier. Wholesale gas prices are a large part of our energy pricing and it typically takes 3 months or more for wholesale prices to filter through to retail prices (the price we pay) which is a large part of how the Energy Price Cap is calculated. The Energy Price Cap is supposed to represent the current market value as a worst case for consumers, in normal market conditions. In recent times, Energy Suppliers (not to be confused with energy wholesalers) have been losing money even when charging at the price cap which is why you will have seen so many suppliers go bust during the early parts of the Energy Crisis.

Here’s an entire history on the Energy Price Cap amounts since it was introduced by Ofgem in January 2019.

* Between Feb 20 and Aug 20, Ofgem changed the average electricity consumption of a home from 3100kwh per year to 2900kwh per year

** Gov’t Price guarantee (not the same as price cap) applies to reduce average bill to £2,500 between Oct 1st 2022 and March 31st 2023

*** From April 23 the Gov’t price guarantee is increased to £3,000 which supersedes the new Energy Price Cap as it is the lower figure

It’s great to see that the wholesale energy prices are coming down, however the price cap is currently not important to consumers as the current (temporary) Energy Price Guarantee is lower.

We predict the next Energy Price Cap announcement in April ahead of June 1st will finally bring bills down around similar figures to April 2022 and the hope is that wholesale prices continue to fall after that, meaning there should be competitive deals to choose from and the price cap is then used for it’s original purpose, to protect households against overpriced tariffs which are not in line with market conditions.

Energy Price Guarantee

Hopefully we now know what the Energy Price Cap is and why it exists. The problem with the Energy Price Cap in recent months is that it rocketed beyond a point where many households could afford, so the Government stepped in. The Energy Price Guarantee is a Gov’t funded (by the tax payer) stop gap designed to protect consumers from the sky high price caps that we’ve seen in recent months. There was an original promise to cap the average household to £2,500 from Oct 1st ’22 to Mar 31st ’23 and in recent weeks we were made aware that the Gov’t reduced that support so that the average household will pay £3,000, even if the Energy Price Cap was higher. Because this figure is below the current price cap, this is the number to work from for the time being. We can disregard the Energy Price Cap when calculating our own bills.

When or if the price cap falls below the Energy Price Guarantee (and hopefully stays below), we’ll hear less and about the Price Guarantee and it will eventually fall away. At this point we’ll be back in the situation where the Energy Price Cap is relevant to us and we should see competitive deals become available.

So what does this all mean for us consumers from April 1st?

With the £400 payment over the winter period ending in March and the £500 increase in the Price Guarantee, it’s easy to feel that your bills will increase significantly. It’s important to take into consideration that this is a maximum figure and you may find that suppliers start to offer deals so do keep an eye out for lower priced deals over the coming months. In addition, your household should use less energy from April as the weather becomes warmer. Our advice is to stay on top of your energy usage, keep doing the great things you’ve been doing to save energy and you may find that your bills don’t increase at all in real terms.

From June 1st, we expect the Price Cap to drop quite dramatically. The advice for now is to sit tight, use as little energy as possible (safely) and stay positive. There are also cost of living payments (means tested) up to £900, warm homes discount, winter payments, disability payments and other options for some of the most vulnerable households, we’ll get those linked up for you on this page by the end of the day.