Liz Truss did a round of BBC local radio interviews on Thursday morning in which she was grilled over the sweeping tax cuts announced by Kwasi Kwarteng at last week’s mini-Budget.
His announcement tanked the price of the pound, which reached an all-time low of £1.0327 against the dollar on Monday, before recovering slightly.
It also forced the Bank of England to step in and purchase government bonds, amid fears that pension funds would otherwise face meltdown within hours.
The Prime Minister struggled to answer key questions during the interview session, while claiming the tax cuts were necessary to help with the energy crisis.
She also claimed multiple times that the “maximum” amount Britons will pay for their annual energy bills from October will be £2,500 thanks to a Government support package intended to protect consumers from rocketing costs when the price cap shoots up on Saturday.
She said “nobody is paying fuel bills of more than £2,500”. However, this is not the case, as the cap is per unit of energy, rather than on total bills.
Here is the energy price cap explained, and how the Government’s support package actually works.
What is the energy price cap?
The price cap limits the amount a supplier can charge for their default tariff. It was launched in January 2019 by energy regulator Ofgem with the intention of keeping down the cost for households across the UK.
It includes the standing charge (a fixed daily amount you have to pay for energy, regardless of how much energy you use) and the maximum price for each unit of electricity and gas. The price is set per kilowatt hour (kWh).
To show what this might look like for an average person, Ofgem uses a figure of 12,000kWh for a household’s annual gas use when announcing the price cap.
However, this is just a guide to see what the change in price cap does to a typical household’s annual energy bill.
The price cap for the average household was set to rise to £3,549 a year in October, but has been frozen at £2,500 for two years under the Government’s “Energy Price Guarantee” announced earlier this month.
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What is the price cap per kWh?
The price per unit has been frozen at 34.0p/kWh for electricity and 10.3p/kWh for gas.
According to Ofgem, a typical household uses 2,900kWh of electricity and 12,000kWh of gas in a year, which works out at the £2,500 figure Ms Truss claimed was the maximum.
However, people who use more energy than the average will pay more than this figure.
Several other factors also affect how much suppliers will charge you for energy under the price cap. These include where you live, how you pay for your energy, and the type of energy meter you have in your home.
Money Saving Expert founder Martin Lewis expressed frustration at the Prime Minister’s remarks. Her suggestion that there is a hard cap on bills will cause confusion and could mean many billpayers are left with the impression that they can use unlimited energy for £2,500, he said.
“There is no £2,500 cap on energy bills,” Mr Lewis said. “Use more, pay more. £2,500 is just what someone with average use would pay.”
He added: “The reason it is so important not to communicate that there is a £2,500 cap is it risks some people, possibly vulnerable elderly people, thinking they can keep the heat on max all winter, and they won’t pay more than a certain amount.”
How is the price cap calculated?
Ofgem bases the price cap on how much it would cost a typical energy supplier to provide energy for an average home.
It uses a raft of factors which impact upon energy bills in its calculations, as well as considering usage levels and market data across a given period.
Key factors include wholesale gas and electricity costs for suppliers, the network costs they have to pay – such as infrastructure – and the operating costs and profit margin of suppliers.
Environmental obligations and taxes can also be considered as part of the price cap figures.
