What is the Ofgem energy price cap and how will it affect your bills?

What is the Ofgem energy price cap and how will it affect your bills?

Ofgem has signalled that it will revise its standing charges as people continue to struggle with their household bills.

According to the energy regulator, it was the “right time” to assess standing charges as people braced for soaring winter bills.

The current processes mean that households of all sizes pay around £303 per year, which is £33 higher than a year earlier.

Ofgem wants to hear from charities, consumer groups and billpayers to provide input on potential revisions.

From October to December 2023, the Ofgem average household energy price cap was at £1,834 a year. This is down from the previous price cap over the summer of £1,923 per year.

However, a forecast by the consultancy firm Cornwall Insight also predicted that the annual energy bill sum for a typical household might still rise in January.

Here’s everything you need to know about who sets the energy price cap and how it works.

Households struggle to manage household bills (PA Archive)
Households struggle to manage household bills (PA Archive)

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.

The price cap was launched in January 2019 by the regulator. Although it was originally a temporary measure, it has remained in place because of the problems in the industry.

The price cap limits the maximum amount a supplier can charge per unit of energy (kilowatt-hour) for households on default tariffs or standard variable tariffs. It was implemented to protect consumers from paying excessively high prices for their energy.

The energy price cap is typically reviewed and adjusted by Ofgem twice a year, in April and October, to reflect changes in wholesale energy prices. However, the specific cap amount can vary depending on factors such as the region and the type of meter.

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, at present, fixed-term tariffs are more expensive than the cap, meaning the majority of people are affected.

Ofgem said: “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, the Government announced a lower energy price guarantee would temporarily replace the cap.

The EPG (different from Ofgem’s cap) sets a maximum price per unit for gas and electricity and pays any costs associated with a bill that is more than that amount. Charities including Citizens’ Advice and National Energy Action have demanded long-term support for homes.

The EPG, which set the typical yearly energy bill at £2,500, ended in July.

How much will you pay?

The average energy bill for individuals paying by direct debit decreased by £426 in July when the Ofgem price cap was reinstated. It will be reduced by a further £151, bringing the average annual cost to £1,923. However, this depends on your consumption.

How does the energy price cap work?

The price cap works by stipulating a limit on the maximum amount that can be charged for a unit of gas or electricity, based on an estimate of the average household user.

From July, unit rates are capped at 30p per kWh (standing charge 53p per day) for electricity and 8p per kWh (standing charge 29p per day) for gas. This is for a typical household, although the total depends on your usage.

This means that it is not the maximum possible cost to a household as, if you burn a higher number of units, your energy bills will exceed the cap while, if you use less, you’ll pay less.

A maximum daily standing charge, which is the cost of getting the power to your home, is also included. The cap is determined by the costs faced by energy suppliers.

The cap is made up of network, operating, and policy costs, as well as VAT and earnings. The amount is set differently depending on whether you pay by a monthly or quarterly direct debit, on the receipt of a bill or prepay for your energy.