January will see another increase in the average household's energy bills, and costs are predicted to stay high into the new year.
Bills are now more than 50 per cent higher than they were before the Covid pandemic, meaning that a person paying by direct debit and consuming a normal amount of gas and electricity will spend £21 more per year.
Ofgem's quarterly cap, which affects 26 million households in England, Wales, and Scotland, places a cap on the cost of each unit of energy.
Billpayers are bracing themselves for a colder season that could strain their budgets after two comparatively mild winters since energy prices skyrocketed.
Energy firms claim to have implemented additional measures, such as emergency credit, hardship money, or the removal of some debts or standing charges, to assist consumers in adjusting to the circumstances. However, homeowners have accrued a total of £3.7 billion in debt to suppliers due to a time of high pricing, which analysts predict will continue. The typical household in arrears owes over £1,300 for gas and over £1,500 for electricity.
Here’s everything you need to know about who sets the energy price cap and how it works.
What is the energy price cap and what is Ofgem?
Ofgem, the Office of Gas and Electricity Markets, is the independent regulator of the British energy market and is intended to protect customers. A key part of its role is to set a limit – a price cap – on what energy firms charge customers on default or standard and variable tariffs.
Ofgem was launched in January 2019 by the regulator and, although it was originally a temporary measure, it has remained in place.
The cap is a regulatory measure designed to limit the amount energy suppliers can charge customers for their default or standard variable tariffs. It aims to protect consumers from excessive energy prices, especially those who do not switch suppliers regularly to find better deals.
The cap applies if you’re on a default energy tariff, whether you’re paying via direct debit, standard credit, or a prepayment meter — it doesn’t apply to a fixed-term tariff.
Previously, variable tariffs had been more expensive than fixed-rate deals. People are often on these tariffs because they fail to switch suppliers when a fixed term has ended or their supplier has been forced to close.
But, presently, fixed-term tariffs are more expensive than the cap, meaning most people are affected.
Ofgem said in August 2022: “The global rises we’re seeing in gas prices mean this is a very challenging time. Right now, this may mean you find few better-value tariffs than being on a supplier’s default rate covered by the Government’s energy price cap, if you are already on one.”
How is this different from the energy price guarantee?
After prices soared following Russia’s invasion of Ukraine in February 2022, the Government announced a lower energy price guarantee (EPG) would temporarily replace the cap. It had set a maximum price per unit for gas and electricity and paid any costs associated with a bill that is more than that amount. The EPG, which set the typical yearly energy bill at £2,500, ended on March 31, 2024 and prices are determined by the Ofgem price cap, which has been the case since July 1, 2023.
How much will you pay?
The cap limits the amount suppliers can charge per unit of energy (measured in pence per kilowatt-hour, or p/kWh) — and the maximum daily standing charge (the fixed cost of being connected to the energy network).
According to the regulator, the average household bill in England, Scotland, and Wales will rise from £1,717 to £1,738 annually, or by about £1.75 per month, starting in January. It comes after a 10 per cent price increase in October.
How does the energy price cap work?
The energy price cap limits the maximum amount charged per unit of gas or electricity for customers on default tariffs. It is based on an estimate of typical usage for an average household. This means that the cap does not limit the total bill a household might receive — if you use more energy, your bill will be higher, and if you use less, you'll pay less.
The cap also includes a maximum daily standing charge, the fixed cost of getting energy to your home. The cap is determined by the costs energy suppliers face, which include wholesale energy prices, network costs, operating expenses, policy costs, VAT, and a margin for earnings.
The specific cap amount varies depending on how you pay for your energy, whether through monthly or quarterly direct debit, on receipt of a bill, or if you prepay for it.
How is the energy price cap different from the energy price guarantee?
The energy price cap and the energy price guarantee (EPG) are related but distinct mechanisms. After energy prices soared following Russia's invasion of Ukraine in February 2022, the UK Government introduced the EPG as a temporary measure to reduce the impact on households.
The EPG sets a maximum price per gas and electricity unit, with the Government covering any costs above this level. This effectively limited the typical annual energy bill to £2,500.
Unlike the price cap, which reflects wholesale energy costs, the EPG was a Government intervention with additional protection. The EPG ended on March 31, 2024, and from July 1, 2023, energy prices have been determined solely by the Ofgem price cap.
