The energy price cap affecting standard variable, or 'default', energy tariffs came into force on 1 January 2019, when it was met with plenty of criticism.
The default tariff cap (also known as the safeguard tariff) is a limit on the unit rate and standing charge that energy suppliers can charge for standard variable - or ‘default’ - tariffs, and is set by Ofgem, the energy regulator.
This is only a cap on what suppliers can charge for standard tariffs, however; it does not ‘lock’ rates, and is therefore subject to a price rise or cut pending review by Ofgem.
The current default tariff cap is set at £1,254 per year (for the typical dual fuel customer paying by direct debit) on standard variable rate tariffs.
Standard variable tariffs are usually the most expensive rates that a customer can be on. If a customer hasn’t switched energy before, or has rolled off a fixed energy deal, they are likely to be on a default tariff.
Better savings can be found by switching — At the time of the price cap announcement, the £1,254 yearly cost was still nearly £300 more than the cheapest energy deal on the market.
False sense of security — The cap can still go up (or down) as energy prices will always be subject to wholesale costs, distribution costs and other factors. The concern is that consumers will assume the price cap means they are protected from fluctuating costs by the Government’s cap.
A cap hurts competition — Introducing a cap does not encourage suppliers to compete for business by offering better tariffs or improving customer service. There is no pressure on energy companies to innovate if customers believe they are ‘safeguarded’ from high costs and less likely to take their business elsewhere.