What is the Energy Price Cap and How Does it Affect Me?

The energy price cap is set by energy regulator Ofgem and aims to limit the amount that energy providers can charge consumers each year. However, from 1 October 2022, the cost of energy has been limited by the Energy Price Guarantee.

Rhiannon Philps Last updated on 21 November 2022.
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What is the Energy Price Cap and How Does it Affect Me?

On 26 August 2022, Ofgem, the independent regulator for the energy market in Great Britain, announced the widely anticipated increase to the energy price cap. However, amid concerns about the rising cost of energy, the government stepped in to introduce the Energy Price Guarantee.

This Guarantee, which started from 1 October 2022, limits the amount that suppliers can charge for each unit of gas and electricity, which means that energy prices won’t rise as much as under the initial Ofgem price cap.

Originally, the price cap was due to rise from £1,971 to £3,549 per year for those on standard variable tariffs, and from £2,017 to £3,608 per year for those on prepayment tariffs.

However, the Energy Price Guarantee means the increase in prices will be smaller. A household in Great Britain with typical usage will now only pay a rate of approximately £2,500 per year until April 2023. The Guarantee will continue from April 2023 until the end of March 2024, but at a higher rate of £3,000 per year.

Read on to find out more about the Energy Price Guarantee and the energy price cap, and what they mean for you.

What is the Energy Price Guarantee?

Until 30 September 2022, the price cap was set at £1,971 for those on default tariffs and £2,017 for prepayment tariffs. Ofgem planned to raise this cap in October, but the government stepped in with an Energy Price Guarantee to limit this increase.

From 1 October 2022 until 1 April 2023, the Energy Price Guarantee will limit the cost of energy. While the cost of energy still increased in October, the Guarantee means that a household in Great Britain with typical usage is estimated to pay around £2,500, instead of the original £3,549 set by Ofgem’s cap.

These figures are calculated based on the energy use of a ‘typical customer’, which assumes they use 2,900kWh of electricity and 12,000 kWh of gas in a year and pay by direct debit.

Therefore, this cap isn’t the maximum amount you pay for your energy. Your bills will fluctuate depending on how much energy your household uses.

If you use more than a typical user, suppliers can charge you more than the headline price cap figure. However, the amount suppliers charge you per unit of energy can’t exceed the limit set by the Guarantee.

For a typical customer paying by direct debit, this limit roughly equates to 10p per kwh for gas usage and 34p per kwh for electricity.

The standing charges for electricity and gas are 46p and 28p per day respectively.

Bear in mind that energy costs can vary between regions, so the price cap may also change depending on where you live.

If you are on a variable or prepayment tariff, your energy supplier will automatically apply a discount to the amount you pay.

If you are on a fixed tariff above the limit set by the Guarantee, you will receive a reduction of up to 17p/kWh for electricity and up to 4.2p/kWh for gas (but you won’t pay less than the amount set by the Guarantee). So if you are on a fixed tariff below the cost of the Guarantee, for example, you won’t receive a discount.

The Guarantee applies to households in Great Britain. Households in Northern Ireland households will receive equivalent support.

In the Autumn Statement on 17 November 2022, it was confirmed that the Energy Price Guarantee will rise from £2,500 to £3,000 for a typical household in April 2023. This new rate will be in place until 31 March 2024.

» MORE: How to deal with the rising cost of energy

What is the energy price cap?

The energy price cap is set by Ofgem, which controls the amount that suppliers can charge customers for each unit of energy, making sure prices are fair and reasonable.

Ofgem first brought in a price cap in 2017 for prepayment tariffs, followed in 2019 by the price cap for standard variable tariffs. From 1 January 2021, these became a single Default Tariff Cap, but there are still different limits for the different tariffs.

By limiting the amount that energy suppliers can charge customers on these tariffs, it ensures that households don’t pay over the odds for each unit of gas and electricity they use. It aims to protect customers from soaring energy costs, especially more vulnerable individuals who may be more likely to be on one of the affected tariffs.

While the energy cap rising isn’t good news for consumers, when wholesale energy prices drop, the price cap falls and suppliers will lower their prices accordingly. In 2021, Ofgem claimed that the cap had helped households on default tariffs to save £75 to £100 a year on their bills.

From October 2022, the energy price cap will be reviewed every four months, instead of every six months. This means that any increase in the price cap will be passed on to households quicker, but it also means that any fall in prices will be passed on quicker.

How does the energy price cap work?

Ofgem used to review the energy price cap twice a year. However, in August 2022 Ofgem announced that it would now be reviewing the energy price cap four times a year. The energy price cap will now change in January, April, July and October.

Ofgem works out the price cap by looking at, among other factors, the global wholesale cost of energy. In other words, the amount suppliers need to pay for gas and electricity.

As suppliers have to pay more for energy, the price cap has risen to allow suppliers to charge customers more to cover these rising costs.

From October 2019 until March 2021 the price cap dropped as energy wholesale prices fell. However, as the cost of energy has rocketed over the course of 2021 and 2022, Ofgem has consistently raised the price cap.

As well as wholesale energy costs, Ofgem also looks at network and operating costs, the cost of the policies and government schemes suppliers have to contribute to, and VAT, to calculate the level of the price cap.

This price cap is the maximum suppliers can charge customers on variable tariffs per unit of gas and electricity.

Does the energy price cap affect me?

The energy price cap directly affects anyone on their supplier’s default standard variable tariff and anyone on a prepayment tariff.

It sets the maximum amount that suppliers can charge customers on these tariffs, so an increase in the cap means energy companies can, and almost certainly will, raise their prices.

The number of households on variable and prepayment tariffs has increased over the past few months as these have been the cheapest tariffs available.

If you’re on a fixed-rate energy tariff, you don’t need to worry about being charged more for your energy, at least until the end of your contract. When your fixed deal ends, you can sign up for a new fixed tariff. If not, you’ll automatically be put on the supplier’s standard rate which is affected by changes in the cost of energy.

However, fixed deals aren’t immune from the increasing energy costs. Suppliers are likely to raise prices on these too, and over the past few months they have typically been more expensive than staying on a variable tariff.

What can I do to save money on my energy bills?

The price cap rising means that the cost of energy is rising, which unfortunately means there’s not a lot you can do to stop your bills from increasing. However, there are things you can do to limit the impact of these rises.

Tariffs

The decision of whether to lock into a fixed or variable tariff is up to you. In normal circumstances, fixed-rate tariffs have typically been cheaper than variable tariffs.

However, over the past few months it has been cheaper for most people to stay on a variable tariff rather than switching to a fixed-rate tariff. As the situation can change, it’s worth researching and comparing the cost of tariffs on a regular basis.

If you’re on a prepayment tariff, it’s worth seeing if you can move to a standard credit meter. This would mean you could pay for your energy by direct debit, which is cheaper than paying for your energy as you use it.

» MORE: Energy tariffs explained

Save energy

The cost of energy is out of your control, but the amount of energy you use is completely up to you. By using less energy, you could cut your energy bills and save money, as well as helping the environment.

From using appliances more mindfully to draught-proofing your windows and doors, there are countless small changes you can make to save energy in your home.

Apply for support

In response to the energy crisis, the then Chancellor Rishi Sunak announced extra support measures to help households with their energy bills. As well as expanding the eligibility criteria for the Warm Home Discount Scheme so more households can benefit from the payment, the government has also brought in some new measures.

From October 2022, all UK households will have £400 deducted from their bills in a set of six monthly discounts. This will be applied automatically and doesn’t need to be repaid.

The government also announced several cost of living payments to help pensioners, disabled people, and low income households who receive certain benefits.

Scotland, Wales and Northern Ireland will also receive extra funding to help households with their energy bills.

There are other existing government grants that may be able to help. For example, schemes such as Winter Fuel Payment and the Warm Home Discount Scheme can offer some much-needed support if you’re finding it difficult to afford heating for your home.

Some energy suppliers also aim to offer support to customers, through grants and other schemes, so check with your energy supplier to see if you are eligible for help. For example, the British Gas Energy Trust offers help to those in financial hardship regardless of who supplies your energy.

If you’re finding it hard to pay your energy bills, it’s important to contact your supplier as soon as possible so you don’t fall into arrears and risk them cutting off your gas and electricity supply.

» MORE: Help if you can’t afford your energy bills

Image source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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