The Government said the change will help about three million households save an average of £21 a year on their energy bills.

Up until now, households on prepayment or pay-as-you-go energy meters paid more on average for their energy than direct debit customers. Energy suppliers argued it cost more to service these homes – such as collecting payments or giving out vouchers – so the charges were passed onto consumers.

But Chancellor Jeremy Hunt announced the changes to prepayment prices in the budget in March. Households with prepayment meters are typically on low incomes, with many people switched to this type of energy meter after falling into arrears with energy payments.

To ensure the prepayment premium comes to an end as quickly as possible, the Government will be funding the change up to April 2024. The Treasury estimates the change will cost the taxpayer £200m. Energy regulator Ofgem will devise a plan that will eradicate the premium permanently after that date.

Earlier this year, the Government took steps to crack down on the abuse of prepayment meters by energy suppliers. The energy security secretary Grant Shapps demanded action from Ofgem and suppliers to put an end to wrongful prepayment meter installations in vulnerable households.

New energy price cap

The new energy price cap of £2,074 took effect on Saturday (1 July). The previous Ofcom price cap was £3,280, but typical bills were capped at £2,500 a year under the Energy Price Guarantee. The new price cap means energy customers will save hundreds of pounds on their bills.

The Government said a lower price cap will help lower inflation as high energy prices drive up prices across the economy.

Amanda Solloway, energy consumers and affordability minister, said: “No one should be charged more for having a prepayment meter – today, we’re putting an end to this historic injustice.

“With households on prepayment meters typically on some of the lowest incomes, this is a vital change. Alongside the hundreds of pounds coming off energy bills from today, thanks to the fall in the price cap – this will offer extra help to ensure families stop being unfairly penalised.”