For months, panic about spiralling energy costs has been building.
Experts spent the summer warning of a ‘winter of discontent’, with the average household bill first predicted to top £3,000, then £4,000, £5,000 and even £6,000.
So when Liz Truss stood up in the House of Commons last Thursday to unveil an unprecedented £150 billion energy support package, there was palpable relief.
Support package: From October 1 our energy bills will be frozen at £2,500 for two years
Consumer expert Martin Lewis declared it would help ‘millions if not tens of millions’ heat their homes, while Citizens Advice chief executive Dame Clare Moriarty said the Prime Minister had ‘hit the brakes’ on spiralling costs.
We were told that from October 1, bills would be frozen at £2,500 for two years. But what does this mean in practice?
Prior to the announcement, customers were at the mercy of the energy price cap, set by industry watchdog Ofgem. This was predicted to rise from £1,971 a year to £3,549 in October.
Overnight, the new Government slashed this figure by roughly £1,000 and insulated households from future rises.
However, confusion remains.
Many customers are still unaware how the new cap will affect their bills. And those who have gambled on fixed tariffs risk being left paying more than the trumpeted £2,500 figure.
What’s more, campaigners point out that just over 12 months ago, the cap was £1,277. So even after last week’s announcement, energy bills have still doubled in a year.
It’s left struggling families frantically asking what they should do now to make sure they get the full benefit of the price freeze and keep costs as low as possible.
Here, Money Mail answers your most pressing questions about the new cap.
How much will I be charged now?
It is important to remember that the new Energy Price Guarantee does not cap your bills. Instead, it limits the maximum amount suppliers can charge per unit of energy used.
One unit or kilowatt hour (kWh) is the equivalent of turning the oven on for 30 minutes. And from October 1, the average unit price for customers paying by direct debit will be limited to 34p/kWh for electricity and 10.3p/kWh for gas.
The £2,500 headline figure is what ministers have calculated the average household will pay each year under its new rules.
It is designed to save customers around £1,000 on what they would have otherwise paid under Ofgem’s cap.
However, exact costs will depend on usage. A house or flat with just one or two occupants will see its average annual bills hit £1,731 from October, according to analysis of Office for National Statistics (ONS) data by Interactive Investor. This is up from £1,365 currently.
Meanwhile, a medium house with two or three people will cost £2,500 a year under the new price cap, up from £1,971. And a large household with four to five people will see bills rise to £3,471 a year.
But these sums will be partially offset by the Government’s £400 energy bills discount. Prior to last week’s announcement, former Chancellor Rishi Sunak had already unveiled a package of support giving all households a monthly discount of £66 up until April.
And this is still going ahead. So, in effect, the average household will only pay around £2,100 a year out of their own pocket.
Customers on standard variable tariffs do not have to do anything as the discount will automatically be applied to their bills. Energy costs can also vary depending on where you live.
This is due to a range of factors, including how much energy is bought from generators in your area and the different charges imposed by local distribution networks.
Under the new scheme, the unit cap for all households on variable deals will be the same, regardless of where customers live.
Households supplied through networks — systems of insulated pipes which connect multiple homes — were previously unprotected by the price cap. Under the new scheme they will receive the same support as other customers.
My foolproof formula to check bills are right
Number-cruncher: Cathy Fernley knows her exact energy use
Cathy Fernley is meticulous when it comes to keeping an eye on her energy bills.
On the 25th day of every month, the grandmother peers into the box in her garden where her electricity meter is kept.
After jotting down the figure displayed on the device, Cathy, 67, copies it into a document saved on her laptop.
Once she has subtracted the previous month’s reading from the most recent, the former school manager multiplies the result by 30.89p — the sum British Gas charges her for each kilowatt hour of electricity used.
Next, the mother-of-three adds her daily standing charge — 39.8p — after multiplying it by the number of days in the previous month.
Finally, 5 per cent is added for VAT, which brought last month’s total to £225.04.
Her gas calculations are even more complicated, because the readings aren’t shown in kilowatt hours and Cathy has to use a formula to work out her monthly costs.
For most of us, it would seem too cumbersome a process to repeat on a regular basis.
But Cathy is quite happy to spend ten minutes every month calculating the exact costs of heating her five-bedroom detached home in Hove.
Back in 2016, she and her husband John, 73, were told they owed £1,133 by their previous supplier. It was the first statement the couple had received since signing up to a fixed deal 11 months earlier.
And, throughout that period, the provider had never suggested increasing their monthly direct debits of £160.
It took a year before they were able to pay off the balance and the pensioners are now determined to keep their account in credit as a result. Cathy says: ‘At least I have an idea of whether we need to increase our direct debit payments or not.’
Should I ditch my fixed deal?
Some may have locked into a fixed deal. This will only affect the minority of customers, as 85 per cent of the population are now on suppliers’ standard variable tariffs. But that still means several million homes will wonder how the new cap will affect their ‘fixed’ bills.
Some fortunate customers will have locked into cheap tariffs before prices began spiralling.
They will not see any change to their bills if the unit price is below the new levels set for gas and electricity until their offer expires.
However, many others signed up to more expensive fixed deals to avoid even sharper price hikes expected next year.
Earlier this summer, some suppliers were offering tariffs that cost the average household over £4,000.
This is more expensive than the price cap but households thought it could save them money in the long run if the price cap had rocketed to £6,000 as feared.
The Government has confirmed those who snapped up fixed deals will be entitled to a rate reduction on their tariff, which is equivalent to the freeze. So fixed rate bills will be reduced by 17p/kWh for electricity and 4.2p/kWh for gas.
It will ensure around 30 per cent — or £1,000 — is taken off their bills. Suppliers will adjust these tariffs automatically.
However, if you locked into a fixed deal that cost the average household more than £4,000, the reduction will be insufficient to stop you paying more than those on the standard variable tariffs.
You do not have an automatic right to cancel your deal without a penalty — unless you signed up within the past 14 days and are within the cooling off period. And some deals have exit fees as much as £600 for a dual fuel tariff.
Suppliers such as British Gas, E.On and Octopus do not charge customers fees if they want to leave a fixed deal.
Gareth Kloet, energy spokesman for GoCompare, adds: ‘Energy firms are obliged to inform customers about any of these kind of changes and once this information has been provided you should be able to discuss what your options are with your supplier.’
Capped: From October 1, the average unit price for customers paying by direct debit will be limited to 34p/kWh for electricity and 10.3p/kWh for gas
Can I just pay for the power I use?
More than half of households pay their energy bills via monthly direct debit, according to Ofgem.
This means customers can pay the same amount each month. They build credit in the summer — when energy usage is typically lower — which is then used to plug shortfalls in the winter, when bills are higher.
Energy companies prefer this method as they know how much money they will receive each month and do not have to chase payments.
But it’s useful for households too, as it means they will not be hit with shock bills over winter.
Yet this payment method can cause confusion. Some customers receive just two bills a year, others quarterly, while four in ten get them monthly.
Justina Miltienyte, head of policy at Uswitch, says: ‘This can leave customers in the dark about their actual energy use and how much it is costing them.’
It might then be tempting to ditch the direct debit payments and ask to pay simply for the power you are using, which is monitored by your meter.
Customers who pay this way are usually charged quarterly. But one major pitfall of it is that energy suppliers typically offer discounts of around 6.5 per cent of the total bill to those who pay by direct debit, according to comparison site GoCompare.
Mr Kloet says: ‘There is nothing to stop you ringing your energy supplier and asking to switch to pay by usage.
But you are likely to lose your discount, which could be worth around £10 a month under the current price cap.
‘Those who pay by use will inevitably pay more over the winter when energy use increases.’
And Kevin Pratt, energy expert at comparison site Forbes Advisor, says: ‘Moving to a pay-by-usage system may seem tempting, however, unless you are drastically cutting your energy usage, winter is the worst time to do this and realistically you will be better off staying on your direct debit payment plan.’
Costs: Under the new price freeze, around five hours of electric lighting will cost 26p while six hours of central heating costs nearly £10
Have standing charges changed?
Under the new freeze, around five hours of electric lighting will cost 26p while six hours of central heating costs nearly £10.
But while there is a benefit to keeping an eye on your energy usage, this is limited due to standing charges.
You pay these fees regardless of how much energy you use.
It means that even if you live in the dark you will still pay around 72p a day — or £21 a month.
Daily standing charges for electricity have increased from 45p to 46p under the new cap, while gas has gone from 27p to 28p. This is a major blow for smaller households, as standing charges make up a larger proportion of their bills.
Should I demand a refund?
At this time of the year, households who pay by direct debit are usually in credit — due to a seasonal drop in use. However, April’s price cap rise has seen energy costs soar this summer.
It means the number of people with a credit balance has dropped from 11 million to 9 million, according to Uswitch.
Under Ofgem rules, you can ask your supplier for a balance refund at any time, if you are in credit.
Generally, it is recommended to keep enough money in credit to cover your next month’s bill. Anything over that can be seen as a surplus.
And your energy firm must pay you back, unless it has reasonable grounds not to.
For example, if you are only in credit by a small amount before winter, you may be refused.
Millions were left waiting for payouts when more than two dozen energy suppliers went bust last year.
If a firm collapses, the supplier who takes on its customers must refund credit balances. But the energy regulator has no set time frame for this and some customers have been left waiting for months.
Rebate: The Government has confirmed those who snapped up fixed deals will be entitled to a rate reduction on their tariff, which is equivalent to the freeze
Any prepayment meter support?
If you are on a prepayment meter, the Energy Price Guarantee will be applied to the rate you pay for each unit of energy.
It means the money you load on to your meter will last longer than it would have otherwise.
As was always the case, these customers will still be charged at a higher rate than other customers.
Suppliers say this is because there is more admin involved in managing these accounts.
But last night a spokesman was unable to tell Money Mail exactly how much these customers would pay for gas and electricity.
Is there relief for businesses?
Businesses have never benefited from the Ofgem price cap — meaning many were left at risk of catastrophic bills.
The Government says it will implement a new six-month scheme for businesses and other non-domestic energy users such as charities and public sector organisations.
It has also committed to a review in three months’ time to assess whether support should be targeted to those most in need.
And there will be ‘ongoing, focused support’ to vulnerable industries beyond the six-month mark. But the details are light so far.
Will there be more help?
The Government is expected to deliver a mini budget this month, No 10 confirmed yesterday — though a date has not been announced.
There has been speculation that this could include a slash to VAT, which is currently charged at 5 per cent on domestic fuel bills.
The saving to the customer would depend on how much energy they use, what tariff they are on and which provider they are with.
However, consumer expert Martin Lewis has calculated that slashing the VAT combined with the £400 energy discount would bring energy bills to around the same figure they are now.
He wrote on Twitter yesterday: ‘That sounds like the type of rabbit a new Chancellor may want to pull out of his hat.’
Households are also entitled to a range of support such as the Warm Homes Discount and Cold Weather Payments.
Find out more at: helpfor households.campaign.gov.uk.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.
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