Rhiannon Philps
Sam Bromley
The energy price cap is set by Ofgem, the independent regulator for the energy market in Great Britain.
It limits how much suppliers can charge a household on a prepayment or standard variable tariff for the energy they use.
But it doesn’t limit your total bill, instead it limits the unit cost of the energy you use. So the more energy you use, the higher your bills will be.
The current energy price cap for a typical household paying their bill by direct debit is set at £1,834 a year. This cap is in place from 1 October 2023 until 31 December 2023.
Ofgem has set this cap using new typical consumption values, which it has updated to reflect the fact that consumers are using less energy.
The new values assume that a typical household uses 11,500 kWh of gas and 2,700 kWh of electricity a year, as opposed to 12,000 kWh and 2,900 kWh previously.
October price cap using previous and new energy consumption values
| Typical consumption values | Direct debit | Prepayment | Standard credit (e.g. cash, cheque or bank transfer) |
|---|---|---|---|
| Previous | £1,923 | £1,949 | £2,052 |
| Current | £1,834 | £1,861* | £1,959 |
*In reality the prepayment cap has lowered the Energy Price Guarantee to bring it in line with direct debit customers, explained below.
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.
From 1 October until 31 December 2023, the energy price cap is set at £1,834 a year for a typical dual fuel household paying by direct debit.
This is a fall in the energy price cap, which was set at £1,976 a year from 1 July until 30 September 2023 (using the new consumption values). Ofgem says that the cap is at its lowest level since October 2021, but it is still significantly higher than the average before the energy crisis began.
What’s more, the government will not be renewing the £400 energy bill support payment, meaning that households may not notice a saving this winter despite the drop in the price cap.
Per unit, the October price cap equates to around 27p per kWh for electricity and 7p per kWh for gas.
The typical daily standing charges will be 53p for electricity and 30p for gas, although these vary by region. Standing charges are the fixed fees you pay to have an energy connection, regardless of how much you use.
Prepayment customers could face a slightly higher price cap of £1,861, but in reality it is lowered by the Energy Price Guarantee to bring it in line with direct debit customers, explained below.
If you pay by cash, cheque or bank transfer, you face a higher cap of £1,959.
The figures used to show the cost of the price cap are calculated using ‘typical values’. The price cap assumes that an average household uses 2,700 kWh of electricity and 11,500 kWh of gas in a year, meaning this cap isn’t the maximum your energy bill could cost. 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 price cap.
Bear in mind that energy costs can vary between regions, so the price cap may also change depending on where you live.
The energy price cap applies in England, Wales and Scotland. The energy market in Northern Ireland works differently and doesn’t have an equivalent cap.
Why do we have a price cap?
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.
When wholesale energy prices drop, the price cap falls and suppliers will lower their prices accordingly.
What was the Energy Price Guarantee?
From 1 October 2022 until 30 June 2023, the Energy Price Guarantee (EPG) limited the cost of energy to a rate of £2,500 per year for a typical household.
This Guarantee temporarily replaced the price cap, with the aim of protecting households from the worst of the energy price rises.
The EPG is in place until the end of March 2024. But, as the price cap is now below the level of the EPG, the EPG no longer applies and the price cap now limits the amount we pay for our gas and electricity.
However, if you’ve got a prepayment meter, the EPG will provide a discount on the price cap to ensure that you don’t pay any more than direct debit customers. From 1 October 2023 to 31 December 2023, the EPG reduces standing charges instead of unit rates. This discount means the prepayment price cap will be £1,821 for that time period.
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.
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.
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.
For example, if suppliers need to pay more for energy, as they did in 2022, the price cap will rise to allow them to charge customers more to cover these rising costs.
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, changes in the price cap won’t immediately affect the amount you pay 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 changing energy costs. Suppliers can raise or cut prices on these too, but your energy will be a fixed price throughout the term of your deal.
» MORE: Are energy prices coming down?
What can I do to save money on my energy bills?
Even though the energy price cap has fallen, energy is still very expensive. But there are things you can do to try to limit the costs.
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, recently 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, especially as more fixed-rate tariffs return to the market.
If you’re on a prepayment tariff, your costs are aligned with those paying by direct debit through the Energy Price Guarantee. But it’s still worth keeping an eye on the tariffs available, to see whether you can get a better deal by switching.
» 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 also brought in some new measures.
From October 2022 to March 2023 all UK households had £400 deducted from their bills in a set of six monthly discounts. This was 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 also received 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 may offer 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
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