Around 11 million households on pricey default tariffs will save an estimated £84 a year after energy regulator Ofgem announced the price cap will drop from £1,126 to £1,042 a year.

It said this is the lowest level of the cap since it was introduced in January 2019.

The four million households on pre-payment meters will also see bills falls by £95 (rounded up) as the current £1,164 limit will be cut to £1,070 between October 2020 and April 2021.

The energy price cap is set bi-annually and limits how much suppliers can charge for each unit of gas and electricity for customers on standard variable (default) tariffs and pre-payment (safeguard tariff) meters.

While it sets a maximum price suppliers can charge, it’s not a maximum bill. The amount customers pay is based on estimates of a typical household’s use.

While suppliers can’t charge default or PPM customers more than the cap, they can charge less.

Ofgem said the reduction has been driven by a sharp decrease in wholesale energy costs following Covid-19.

It noted: “The Covid-19 crisis has depressed energy demand although wholesale gas prices have started to recover since hitting 20-year lows in the spring.

“If wholesale energy prices continue to rise over the coming months, the cap is likely to rise in April to reflect these higher costs.”

Jonathan Brearley, chief executive of Ofgem, added: “Millions of households, many of whom face financial hardship due to the Covid-19 crisis, will see big savings on their energy bills this winter when the level of the cap is reduced.

“They can also reduce their energy bills further by shopping around for a better deal. Ofgem will continue to protect consumers in the difficult months ahead as we work with industry and government to build a greener, fairer energy market.”

‘This isn’t a good deal’

Peter Earl, head of energy at comparethemarket.com, said: “Don’t be fooled into thinking you’re getting cheap energy. The price cap is not a good deal, it’s a maximum price limit. While it is encouraging that from October customers on a standard or default tariff (SVT) on average will see their annual bill fall by £84, customers could stand to save, on average, £217 more if they switched to one of the best priced deals on the market.

“Customers who have switched supplier in the current price cap period have benefited from some of the lowest prices we have seen in recent years. The pandemic crisis has seen a rise in energy costs for households spending more time at home, paying £32 per month more on average. Customers on an SVT will have paid even more. We urge people to avoid being lulled into inertia as a result of this news, but rather shop around to see what savings they can make by switching.”