Ofgem energy price cap falls 12.3% - what it means for your energy bills

The Ofgem energy price cap has fallen 12.3% to its lowest level in two years.

It means gas and electricity bills have dropped by an average of £20 a month for around 29 million households across Great Britain, with the average home's bill falling to roughly £1,690. The actual amount you'll pay will depend on how much gas and electricity you use, as the cap applies to unit rates and not your total bill.

While the announcement means prices have reached their lowest level in two years, the drop was not as large as expected. Bills also remain significantly higher than they were before the energy crisis, with very few fixed-rate deals being competitive with the price cap.

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It comes as Ofgem has announced it will consult on the future of the energy price cap. With the UK moving towards renewable energy, the regulator has said it needs to adapt the energy bills limit to make it fit evolving habits, such as driving an EV.

Away from energy bills, consumers have also been hit by an array of price hikes for their utilities. Council tax, water bills and broadband costs have gone up by more than the rate of inflation.

Ofgem energy price cap will be ‘lowest in two years’

Energy bills for a typical household have fallen 12.3% (£238 annually) to £1,690 per year since 1 April. Given the price cap is set on a quarterly basis, it’s better to envisage it as an average £20 a month fall in your costs.

The unit rates under the new cap (for those paying via direct debit) are:

• Gas: 6.04p per kilowatt hour (kWh); 31.43p standing charge per day
• Electricity: 24.5p per kWh; 60.1p standing charge per day

The latest cap is 2% more expensive than had been forecast by experts. This largely came as the result of an unexpected increase in standing charges, which Ofgem attributed to “increasing network costs”.

Ofgem is currently reviewing the future of standing charges, having consulted on the controversial system earlier this year. Standing charges for homes with a prepayment meter will also be brought in line with those for other types of meter, the regulator has announced. It means there will no longer be a premium for those who have to actively top up their meter.

A big fall in wholesale prices, which drove the reductions in the cap, was also offset slightly by a new ‘bad debt’ allowance. With the level of consumer debt hitting a record £3.1 billion, the energy regulator has enabled suppliers to charge an extra £28 a year (£2.33 per month) to cover their costs. This additional charge only affects direct debit and standard credit customers.

The CEO of Ofgem, Jonathan Brearley, singled out the need to quash “stubbornly high” debt levels and warned they could lead to “higher bills in future”. He said the regulator would be reviewing the situation.

But Brearley was more positive about the next price cap rate: “This is good news to see the price cap drop to its lowest level in more than two years, and to see energy bills for the average household drop by £690 since the peak of the crisis. But there are still big issues that we must tackle head-on to ensure we build a system that’s more resilient for the long term and fairer to customers.

“Longer term we need to think about what more can be done for those who simply cannot afford to pay their energy bills even as prices fall. As we return to something closer to normality we have an opportunity to reset and reframe the energy market to make sure it’s ready to protect customers if prices rise again.”

What does the new Ofgem energy price cap mean for my energy bills?

The first key thing to note is that the only figure that truly matters when it comes to your energy bills is the 12.3% fall. The monetary figures only really apply to Ofgem’s idea of an average household.

The regulator’s price cap sets a limit on what you can be charged per kilowatt hour (kWh) for your gas and electricity, as well as how expensive standing charges can be. Your final bill will depend on how much energy you use.

So, the actual saving you make could be higher or lower than this figure depending on: the type of property you live in, how many people are in your household, and where you live in Great Britain.

It’s also worth noting that this change will not take effect until 1 April. When it does, it will apply for only three months, after which bills could go higher or lower (current forecasts suggest another big drop is on the way).

According to consumer website Uswitch, the latest price cap should lead to better competition on the market for fixed-rate deals. Its director of regulation, Richard Neudegg, said: “If you’re thinking of switching to a fixed deal, pay attention to any exit fees, which could cost between £25 and £150 per fuel. If you change your mind after the cooling-off period or spot a better deal you wish to switch to, you may need to pay to leave.

“If you’re not sure whether to opt for a fixed deal, perhaps consider a variable tariff, which often has no exit fees so you can switch away if a better option becomes available. There are some variable tariffs cheaper than the cap, so it’s worth running a comparison.”

How have experts reacted to the news? 

Cornwall Insight, the energy consultancy which has accurately predicted the Ofgem energy price cap throughout the energy crisis, said healthy international gas trade, a mild winter, and higher-than-expected gas supplies in Europe and Asia were the biggest drivers behind the reductions in energy bills.

Looking ahead, the firm’s principal consultant, Dr Craig Lowrey, said: “Signs currently point towards costs remaining below current levels for the rest of the year, and while it's wise not to get ahead of ourselves, there are promising signals that the energy market is starting to stabilise.

“While the prospect of lower bills is certainly positive, they still remain hundreds of pounds above what customers were paying at the start of the decade, with little to indicate that will be changing any time soon. Ofgem’s review of standing charges, alongside other discussions on how the cap is calculated, will no doubt have a positive impact on the energy costs of some households, but fundamental questions remain on how to address the challenge of affordability for households. The price cap is unlikely to be the ticket back to pre-energy crisis bills."

“Ultimately progress requires investment in a resilient, sustainable, energy system, one based on renewable energy supplies and improved energy efficiency. As we approach the general election, we would urge politicians to prioritise this critical issue and unveil solid plans for action.”

In the short term, the latest fall in energy bills could prove useful to Prime Minister Rishi Sunak and his Chancellor Jeremy Hunt. According to analysis by ING Economics, the fall in energy costs could push inflation down to 1.9% in April and down to 1.4% by June. The headline rate of the CPI tumbled to 3.4% in February.