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

·4-min read
What is the Ofgem energy price cap and how will it affect your bills?

Between July and September, the annual average energy price cap dropped to £2,074, easing some of the financial strain brought on by the unprecedently high rise in gas and electricity prices.

The new cap amount contrasts to the £3,280 level established by Ofgem for March through June, which ended up resulting in a reduction of £1,206 in the cap as of July and a reduction of £426 in average annual costs.

With the announcement of the price cap, the Government's Energy Price Guarantee (EPG), which set the average annual energy cost at £2,500, will also come to an end in July.

The EPG rather than the Ofgem price cap currently applies to the UK.

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.

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

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 had 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. Long-term support for homes has been demanded by charities including Citizens Advice and National Energy Action.

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

How much will you pay?

The average energy bill for individuals paying by direct debit will decrease by £426 starting in July when the Ofgem price cap is reinstated; however, this will depend on your consumption.

How does the energy price cap work?

The energy 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 will be 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.

Ofgem’s price cap is currently £2,054 per year for the average household.

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 if you pay by a monthly or quarterly direct debit, on the receipt of a bill or prepay for your energy.