Mini-pod: Energy Price Cap drops 7%, but it’s still pants!

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0:23Hello, welcome to a special mini edition of the Martin Lewis podcast on the back of the announcement that the energy price gap is to drop by 7 % on the 1st of July. I'm going to start you with an interview I did on it on Five Live Breakfast, and then I've got more extra information on the back end. This is my podcast. I need to give you a few of the nerdy bits. Now I've been talking about this all morning. The energy regulator Ofgem has announced that the price cap for household energy bills will be lowered by 7 % from the start of July. So it's set to fall by£129 a year for a typical household.

0:57Founder of Money Saving Expert and also Five Live's own Martin Lewis, is here. Morning, Martin. Morning, Kylie. I'm so sorry. I'm going to have to correct you. That information that the BBC has been putting out today is simply wrong. Oh, what have we got wrong? You're quoting a drop of£129. Now, the first thing is that's based on someone on typical use. Now, no one's on typical use. Everyone is either more than typical use or less than typical use. That's how averages works. But more importantly, the price cap is only for July, August and September. It's a quarterly price cap. It lasts three months.

1:30So to quote a saving of£129 a year, as the BBC has been doing across all its outlets, is simply false. It's a three-month price cap. You can't have an annual saving of£129 because it only lasts three months. So the far better way, if you forgive me, that I would explain it is in simple terms, it means for every£100 you pay for energy now, in July, August and September, you will typically pay£93. What's actually happening is the standing charge for electricity is dropping four and a half percent. And the unit, that's the daily charge, the unit rate for electricity is dropping 4.8 percent. That's how much you pay for each unit of electricity you use.

2:10The gas standing charge is down 8.7 percent. The gas unit rate down 9.4 percent. So in reality, while I say it's 7 percent drop, if you're gas and electricity, you might see a little bit higher drop than that. If you're electricity only, you will see a little bit lower drop than that. And while, of course, a drop is welcome, this is nothing to shout home about. We saw the price cap go up 10 % in October, 1 % in January, 6 % in April. So all this cut is doing is effectively reversing the April price hack and putting us back to where we were at the beginning of the year. We are still, this July, August and September, going to be paying 10 % more than we did in July, August and September 2024.

2:55But does this mean it's time to start shopping around? Well, what I would always say is I'd never shop around. I would do a proper comparison on the whole of market comparison site. But absolutely right. Let's look at what's going to happen to energy as far as we know. It's coming down 7 % in July. The current prediction for the October price cap is it's going to drop between 0 % and 4%, depending which analyst you look at. then in January, it's going to go up maybe 1%. And in the following April up, maybe 2 % or 3%. Now, the further out you go, the more crystal ball gazing it is. And of course, with the big orange fella sitting in the White House, the world economy is really changeable.

3:35So all those things could change. But if you look at that pattern effectively, it's coming down 7 % in July, and then it may go down a little and go up a little, but it's going to stay at that level. the cheapest fix on the market that you can lock in today, so your saving would start now, not in July, is 18 % less than the current price cap. So it's far, far lower than the July price cap and far lower than where the price cap is predicted to go. And in fact, that is why I say the price cap is a pants cap. You shouldn't be on it. You should be on a cheap fix. The price cap was originally set up as a backstop tariff for those who couldn't or weren't able to fix.

4:14During the energy crisis, it effectively became the regulated price we all pay because there was no competition. But even now, 65 % of homes are on the price cap. Only 35 % are on special tariffs. If you're not on a fix or your fix ended and you didn't move or you're not on a special tariff, you're on the pants cap. And unless you're on prepayment where you can't get it off, you should get off it by going onto a site like Cheap Energy Club, which is my comparison site because that's whole of market unlike most, and finding what your cheapest fix is. It depends on your region and what you use and locking in.

4:45I can't promise it will win, but on the very strong balance of probabilities based on the predictions right now, fixing would save you substantially. And some recent research that I've done show that at every point over the last 12 months, the cheapest fix would have substantially undercut being on the price cap. Before I let you go, I've just got to ask you a very important question. We've been asking about phones in restaurants. Do you take your phone if you're going out for dinner? Do you take your phone? Do you scroll through it while you're at the table? Take pictures of your food, post them online?

5:18I do occasionally. But if I'm going out for dinner with my wife, let's say, who is the person I go out for dinner with most often, funnily enough, as people may know, I'm a games obsessive and so she. So we often take a travel scrabble set or we take crosswords, two identical crossword books that we compete against each other at. Now, the reason for this is, like most people, when I finish a day's work, you might be surprised because I talk a lot. I can't communicate. I've had it. I don't want to talk, but I want to do something that engages with Lara, that engages with my wife. And so actually playing a game of Scrabble where I don't have to talk or doing competitive crosswords against each other gives us that engagement without having to have the conversation when you can't do it.

5:55So my phone does come out occasionally, but more often than not, it's a book or a game. I'm loving this image of you sitting there with Lara doing your crosswords in a restaurant. Well, the Scrabble set is what always causes attention. We have different travel Scrabble sets. But I proposed on a Scrabble set. So when I proposed to her way back in 2009, I'd pocketed letters cheating. I don't normally cheat. I'd pocketed letters. I had two blanks. And so I picked the blanks, so I got to go first. And then I had the letters, Will You Marry Me, which is two seven-letter words if you do it in the right way.

6:27And I started putting them on the board. And she's going, What are you doing? What are you doing? I was like, Shh. And then I turned the board around. It said, Will You Marry Me? Thankfully, she said, Yes. Oh, of course she did. Martin, it's a pleasure to talk to you as always. Thank you very much indeed. No, I wasn't expecting it to go there either. Crosswords, scrabble and proposals. But let's get back to the energy price cap. I want to give you a bit more detail. I know many people like to know the exact new rates. So here are the new July average direct debit rates of the price cap. First of all, electricity.

6:59The standing charge, the daily charge, 51.37 pence per day on average, down from 53.8 pence. That's down 4.5%. The unit rate, 25.73 pence per kilowatt hour used. It's currently 27.03 pence. So that's down 4.8%. Remember, there are regional variations. These are the UK averages. Gas is going down more. The standing charge is going down to 29.82 pence a day. It's currently 32.67 pence. So that's down 8.7%. The unit rate is going down to 6.33 pence per kilowatt hour. It's currently 6.99 pence a kilowatt hour, down 9.4%. That does also show you how much cheaper using a unit of gases than using a unit of electricity.

7:47As for other things, I think it's worth you knowing in brief. Well, I think one of the most important ones is, as you hear, I'm urging people to do a comparison on a whole of market comparison site. But what you have to understand is if you do a comparison right now, the prices, if you're on the price cap that it will be comparing to, the reference price for the saving is based on the current April, May and June price cap rates. It's not based on the July rates. So the saving that you see will be overinflated because we know the price is coming down in July. That isn't a criticism of comparison sites because, you know, as many of you will know, I'm involved in the comparison site, too.

8:30And we have to do the same thing. It's because firms have not published their tariffs yet. And when you do a comparison, you have to do it based on actual tariff rates rather than on the price cap rates. So just remember, when you get a saving of, say, 16 percent, in reality, compared to the July price, it'll be a saving of around 9 percent. But I would still strongly urge anyone on the price cap to be doing a comparison right now and to be seeing if you can save yourself, because the likelihood is a cheap fix will save you. Just a quick note. I know many people who are already fixed, they hear the news about the price cap and they think if prices are going down, should I wait?

9:06Remember, the price cap is based on retrospective prices. The reason it's announced now what the July price cap will be is because the July price cap is effectively based on wholesale rates in March, April and May. So the middle of February to the middle of May. So it's a retrospective look back of wholesale rates for three months. The rate at which new fixes are set. Well, that is based on the current wholesale rates available and a look ahead to where wholesale rates will be. So the fact the energy price cap is coming down in July has no bearing in reality in the big picture, maybe a tiny bit of competitive change, but no real bearing on the prices at which fixes are set.

9:50Because that July price cap rate is based on looking backward. Fixes are based on the current price and looking forward. What, of course, you want to know is will fixes get any cheaper? I'm afraid I can't tell you because it's simply based on wholesale rate market moves and we don't know what is going to happen there. But what I do know is if you can get a cheap fix now that's 18 % cheaper than the current price cap, then you will be saving from the next few days. You will already have your price drop and that drop will stay for the next year guaranteed. Early exit penalties aren't that big anymore.

10:20So in the very unlikely event that something changed in the world, that energy prices really slammed down and therefore your fix was looking expensive and you wanted to get out of it. I think that's very, very unlikely to happen. I think on the balance of probabilities, that fix is likely to be far cheaper. But if that did happen, well, you would just pay the early exit penalties and get out and go to a cheaper fix. That's it for this special mini edition of the Martin Lewis podcast. Hope you found it useful and I'll see you for the main podcast. Next week's half term, so I'm not going to be there in about 13 days time.

10:54Martin Lewis is the founder of MoneySavingExpert.com, but other consumer and price comparison websites are available. You can get in touch with Martin's podcast team by emailing martinlewispodcast at bbc.co.uk. The offers and rates mentioned in the podcast are correct at the time of recording. However, if you're listening on demand, it's worth double checking as the details can date.