There has been much talk in recent weeks of the 'energy price cap' with much of the news around the cap coming as fuel costs continue to rise for households across Wales and the UK as a whole.
Commentators are saying that the cost of living crisis currently gripping the nation is set to get even worse once the summer is over. But it has left many people scratching their heads and wondering what the energy price cap actually is and why it is set to rise?
For households on default tariffs who pay their energy bills by direct debit, the current price cap - set only in April, stands at £1,971. But the energy regulator Ofgem (Office of Gas and Electricity Markets) has warned that this is set to leap to about £2,800 in October, just as winter will be approaching and it will be getting colder.
That would be an increase of 54 per cent for families and individuals who are already struggling. It would mean the average household will be paying an extra £693, with many wondering how they will cope. Energy firms say this is unavoidable because of rising wholesale energy prices.
What is the energy price cap?
Ofgem, as the UK's independent energy regulator, has the task of making sure that customers are given protection from dramatic rises in fuel prices. The price cap is the mechanism it uses to limit the amount of money electricity and gas suppliers can charge people on default rates.
They are also known as standard variable tariffs and are the most common - especially for those people not inclined to change supplier. It is also the default tariff for anyone who is forced to change supplier after the previous firm they were with went bust, as has been the case for many people in the last year.
They are usually the most expensive because the firms can change the unit prices they charge at any time. It means the price cap currently affects about 23 million customers in the UK.
For standard energy bills, the maximum standing charge per KWh (kilowatt-hour - or how much energy you use per hour) a firm can charge you is limited by the price cap. Under the existing arrangements, there is another price cap for anyone with a prepayment meter in their home.
Why is it set to rise?
When the price cap mechanism was brought in three years ago, it was decided that it would be reviewed and could be changed twice a year - in April and October - to reflect seasonal energy use. That's why the next review will be in the autumn.
Ofgem has warned that there could be a dramatic rise in the cap because wholesale energy prices are forecast to continue their sharp rise. This is due to a variety of factors which include Russia's invasion of Ukraine and many countries limiting or weaning themselves off their reliance on Russian oil and gas imports.
In another scary development, however, the regulator has muted the idea of reviewing the price cap every three months instead of the six. The idea is currently under consultation and no decision has been taken to introduce another change come the new year.
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How is it calculated?
The price cap is set according to the amount it costs for an energy supplier to provide electricity and gas to the average household in the UK. Ofgem uses a range of different ways to calculate this. Usage levels, wholesale energy prices and network and operating costs are the main factors.
Help for customers
Anyone worried about being able to afford to pay their bills is advised by Ofgem to contact their electricity and gas supplier as soon as possible. That is because, under the rules, they have to provide some kind of alternative payment plan you can agree to which makes it easier.
Customers are entitled to ask for more time to pay. There is also extra help in the form of hardship funds for anyone struggling to pay can get help from. In other instances, payment breaks can be agreed - or the overall bill reduced in certain circumstances.
There is often help available from suppliers to help you make your home more energy efficient. Many customers will also qualify for help in the form of Winter Fuel Payments or the Warm Home Discount Scheme.
For more help and advice visit the Ofgem website by clicking here.
