The energy regulator, Ofgem, sets the energy price cap every quarter, which then dictates how much millions of customers pay for their gas and electricity.
Ofgem recently announced that the cap will rise by 6.4% from April, in a major blow for billpayers.
But what is the energy price cap and how exactly does it impact your gas and electricity bill?
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Introduced in 2019, the energy price cap was brought in to set a limit on how much suppliers can charge customers on standard variable tariffs for energy. It was a protective measure to ensure households do not get ripped off with extortionate prices.
The energy price cap has increased on the last two occasions and will rise again this April. On 1 October last year, the cap pushed energy bills up 10% due to a rise in wholesale prices. The cap then rose by 1.2% on New Year’s Day.
On 1 April, the price cap will jump again, this time by a bigger-than-expected 6.4%.
What is the Ofgem energy price cap?
The Ofgem energy price cap sets the maximum unit rates energy firms can charge for standard variable rate tariffs. It caps the price per kilowatt hour (kWh) for gas and electricity, along with the standing charges for each fuel. It is not a cap on your total energy bill. What you'll pay is mostly determined by your energy usage.
It is set every three months, and is mostly based on wholesale prices. Supplier profit margins and network infrastructure maintenance costs are also used to set the rate.
The cap currently applies to about 22 million households in England, Wales and Scotland. Northern Ireland has a tariff review process instead of a price cap.
Under the current cap, which runs from January to March, the average home pays an annual figure of £1,738 for typical usage.
This figure is purely illustrative. The amount you pay will vary by usage, and also depend on where you live in the country, as each region has a private operator that runs the mains networks.
Here are the average unit rates per kilowatt hour (kWh) and daily standing charges under the current price cap, for Direct Debit billpayers:
Gas
- Unit rate - 6.34p per kWh
- Standing charge - 31.65p per day
Electricity
- Unit rate - 24.86p per kWh
- Standing charge - 60.97p per day
The energy price cap was initially put in place to protect vulnerable households. Before the energy crisis, you would only drop onto a variable tariff if you let your fixed deal expire and didn't switch to a new deal. To prevent consumers in this situation from being overcharged, Theresa May's government brought in the cap.
However, when the energy crisis hit in late 2021, almost all fixed deals disappeared from the market. This was down to surging wholesale prices, which meant dozens of providers went bust, including Bulb Energy, Zog Energy and Pure Planet. The fixes that were on offer tended to be much more expensive than variable rate tariffs.
So, most households dropped onto variable rates (and therefore, the price cap) when their fixes expired. The only time people didn't was between October 2022 and June 2023, when the government operated the Energy Price Guarantee (EPG).
The EPG acted as a safety net. It effectively subsidised suppliers so consumers did not see their bills rocket when the Ofgem price cap soared in the wake of Russia's invasion of Ukraine. Once wholesale costs fell, and the Ofgem cap went below the rate of the EPG in July 2023, households once again found themselves on the price cap rate.
Since then, fixed-rate energy deals have returned, giving customers more choice if they want to try and beat April’s price hike and get certainty over their payments going forward.
When is the next Ofgem energy price cap announcement?
Ofgem will announce the next energy price cap on 27 May. The cap will run from 1 July to 30 September.
What’s happening with standing charges?
One major criticism of the energy price cap is how it sets standing charges. These fees are used by energy companies to pay for the critical infrastructure that powers our homes.
Standing charges mean you can pay hundreds of pounds a year before you’ve even used any gas or electricity. They also vary depending on where you live in the country. For example, the forthcoming price cap will see standing charges reduced for most areas from April, but some customers in London and the North Wales and Mersey region will see an overall increase of up to £20 a year.
Ofgem recently asked for the public's views about whether it should introduce new rules on standing charges.
The regulator is now consulting on plans to force energy firms to offer tariffs that have zero standing charge. It would mean energy suppliers would have a dual pricing offer – with, or without, a standing charge – to give customers greater choice and reduce energy bills for some households.
The one without a standing charge would have a higher price for each unit of energy. Both tariffs would fall under the existing price cap system.
However, the plans have been criticised by some charities and energy groups for their complexity. They also argue that standing charges won’t become more affordable as they will just be shifted to another part of the energy bill.
Will energy prices fall?
Energy consultancy Cornwall Insight predicts that bills will fall in the third quarter of this year.
It suggests the July to September energy price cap will drop to £1,756 for an average, annual bill - down by about 5% from the £1,849 April to June cap.
The consultancy adds that predictions for the July price cap remain sensitive to the high levels of volatility in the energy market, noting “it is extremely likely that forecasts will change multiple times before the July cap is set”.
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