Ofgem Energy Price Cap Explained

Friday 1 April 2022 marked the start of a new energy price cap administered by the market regulator, Ofgem. But what exactly does that mean for your energy bills? Find out with our Q&A.

For the very latest information on the price cap, including prospects for October 2022 – when the cap could rise from £1,971 to around £2,800 – see our Energy Updates page.

Q. What changed on 1 April?

A. The new energy price cap level, which was announced in February 2022 by energy regulator Ofgem, took effect.

The cap is now set at £1,971 a year for a household with average energy consumption on a ‘dual fuel’ gas and electricity standard variable rate tariff (SVT), paying by direct debit. That’s a staggering 54% higher than the previous cap of £1,277.

If you’re on a prepayment meter, the cap rose from £1,309 to £2,017 a year (again, the figure is for households with typical usage – the amount of energy you use will always determine the amount you pay).

The price cap will change again in October, when it is expected to rocket further, perhaps as high as £2,800.

There is also an Ofgem proposal – which is likely to be rubber-stamped – that the price cap review cycle should move from six-monthly to quarterly so that it can respond quicker to movements in wholesale prices.

Q. I’m on a fixed rate deal – will the cap rise affect me?

A. If you’re still on a fixed-rate energy tariff you won’t be affected until your deal ends and you move on to your supplier’s SVT. If you are offered a new fixed rate tariff with your current supplier (more on this below) you’ll likely find it costs as much – if not more – than April’s price cap, so your energy bills will still go up.

Q. What is the energy price cap exactly?

A. Introduced by market regulator Ofgem in 2019, the energy price cap sets the maximum amount that energy suppliers are permitted to charge per kWh of gas and electricity (known as the ‘unit rate’) each year.

It also incorporates a maximum daily standing charge which is the cost of actually getting the power to your home.

Q. Aren’t I paying more for my energy already?

A. If you feel as though your energy bills have already gone up, you’re probably right. The cap is reviewed twice a year, in February and August and takes effect in April and October respectively. And it went up from £1,138 a year to £1,277 in October 2021.

Naturally, energy suppliers go about adjusting the cost of their SVTs to the same level or just a few pounds below the cap, so you’ll be paying the cap rate if you’re a SVT or ‘default’ tariff customer.

Q. Why are energy costs so high?

A. The price of gas on wholesale markets has been at painfully high levels for well over a year. And now, as Russia is a major supplier to international markets, the devastating conflict between Russia and Ukraine has seen wholesale gas prices fluctuate wildly – rising as high as three times the level they were just at the start of the year.

Q. Will my energy bills be the same as the cap?

A. The price cap is the maximum unit price of energy charged to a SVT household consuming an average amount of energy. It’s not the maximum amount every household will pay. So, if you burn a higher number of units than the average, your annual energy bills will be more than the cap.

In this case, limiting your energy use where possible, can help to reduce costs.

The price cap can also vary depending where you live – particularly the standing charge element. This is due to varying costs for transporting energy across the energy network to the region you live in.

Q. What can we expect from the next price cap?

A. The next price cap announcement will be announced in August, to take effect in October. Commentators are mooting another increase of at least 25% on April’s figure, which would take typical energy costs towards £2,500 a year. Some analysts have even suggested £3,000 or even £3,500 is not unrealistic.

Many households have already been pushed into fuel poverty – defined as when paying for a reasonable amount of energy leaves insufficient funds for other necessary expenses.

The latest report from debt charity StepChange shows that, for those clients who were responsible for paying utility bills, 28% were in arrears on their electricity in February and 23% on their gas – a situation that the charity expects to get worse after the new price cap takes effect.

This is coupled with the crippling rising costs of other household essentials such as mortgage repayments, petrol and groceries.

Q. Can I get a fixed rate energy tariff?

A. We have now reached a crisis point in terms of energy costs, and shopping around for a cheaper fixed rate tariff with a different supplier using a comparison website, is simply no longer possible.

That said some energy firms, such as E.On, are allowing existing customers to fix their tariff for 12 months at the cost of the April cap. This will at least provide shelter from October’s inevitable rise in energy costs.

Q. What can I do about my energy bills?

A. Making an effort to use less energy can help to reduce costs. If you haven’t already got one, getting a smart meter installed, which is free to the customer from your energy supplier, may help you keep track of the energy you are using. Or a simple energy monitor could also do the trick.

You can then at least identify the main culprits when it comes to seeing which appliances burn the most money and, hopefully, adjust accordingly.

This October, all domestic electricity customers will automatically get £200 off their bills. But bear in mind this is a loan (or essentially a levy) which must be repaid over five years, starting from the following April (2023) at £40 a year.

If you are finding yourself struggling to pay your energy bills, contact your energy supplier. Under Ofgem rules it must offer a payment plan that reflects what you can reasonably afford. If you are on a prepayment meter and can’t top up, you can request emergency credit.

If you are getting into debt with household bills or other costs, contact a debt charity such as StepChange for independent fee-free advice.

Q. Will I pay less if I don’t send a meter reading?

A. No. Sooner or later you’ll have to pay for all the gas and electricity you use. If your supplier doesn’t get a reading from you, it may estimate your bills, which could end up with you paying too much anyway. And it will eventually send someone to do a reading, at which point you might find yourself having to make up a shortfall.

And remember, if you have smart meters, they send readings automatically to your supplier, so your bill will always be accurate.

Q. What about prepayment meters?

There is a separate cap for those on prepayment tariffs (an estimated four million households). The cap was introduced in April 2017 and, as with the default tariff price cap, it means suppliers cannot set their prices for units of energy above a stated level. 

The prepayment cap is also reviewed every six months, in April and October.

Q. How has the energy price cap changed until now?

Here is a timeline of previous energy price caps (for a typical default/SVT tariff customer – a dual fuel single rate customer paying by direct debit using a typical amount of energy:

• 1 January to 31 March 2019. The first cap level was set at £1,137 a year (existing prepayment cap remained at £1,136 a year)
• 1 April to 30 September 2019. Cap increased to £1,254 a year (prepayment to £1,242 a year)
• 1 October 2019 to 31 March 2020. Cap fell to £1,179 a year (prepayment to £1,217 a year)
• 1 April 2020 to 30 September 2020. Cap fell further to £1,162 a year (prepayment to £1,200 a year)
• 1 October 2020 to 31 March 2021. Cap fell further still to £1,042 a year (prepayment to £1,070 a year)
• 1 April 2021 to 30 September 2021. Cap increased to £1,138 a year (prepayment to £1,156 a year)
• 1 October 2021 to 31 March 2022.  Cap increased further to £1,277 a year (prepayment to £1,309 a year)
• 1 April 2022 – 30 September 2022. Cap increases further still to £1,971 a year (prepayment to £2,017 a year)

Q. Anything else I should know?

A. Because of wholesale energy prices, Ofgem now has the power to update the price cap more frequently than once every six months in exceptional circumstances to ensure that it still reflects the true cost of supplying energy.

However, in his recent Spring Statement, the Chancellor Rishi Sunak was careful to point out that the cap will remain in place at the current level until the autumn, easing any fears that it might be raised in the interim in response to soaring costs.