How Does the Energy Price Cap Work in the UK?
How Does the Energy Price Cap Work in the UK?
If you’re paying for household electricity and gas in the UK, chances are you’re on a default or standard variable tariff. This means the amount you pay falls under Ofgem’s energy price cap.
But what exactly is the energy price cap and how does it work?
Most importantly, does it reduce bills and ensure you’re paying a fair price for your energy usage?
In this article, we explain everything you need to know about the energy price cap. We’ll cover the current energy price cap and how it’s calculated, future price caps, as well as what this means for typical households.
What is the energy price cap?
The energy price cap is a limit on the maximum amount energy companies charge (per unit of energy) on their standard variable tariffs.
Referring to the amount you pay for energy, you’ll sometimes also see standard variable tariffs called “default tariffs” or “capped tariffs”.
The energy price cap covers both the “unit rate” as well as “standing charges”. The unit rate is how much you pay for the energy you use. Standing charges are a set amount customers pay each day (essentially paying for a connection to the national energy grid), no matter how much energy they use.
Ofgem, the energy regulator for the UK, set the energy price cap. They review it every three months. So this means it usually changes in January, April, July and October.
This January 2024, the energy price cap rose by £94 (that’s +5%).
For a typical household, it rose from £1,834 a year (back in October 2023) to £1,928. We’ll unpack what this means for your bills in more detail below.
The Ofgem price cap only applies to England, Wales and Scotland. If you live in Northern Ireland, it’s the Utility Regulator that’s responsible for the equivalent role.
How does the energy price cap work?
Ofgem started the energy price cap in 2019. It began because of worries customers were paying too much for their energy.
While it was originally planned to only last a year, the energy price cap is set to remain until at least the end of 2024.
The energy price cap works by setting a limit on the amount you pay for each unit of electricity and gas. Units are measured in pence per kilowatt hour (p/kWh). The energy price cap also sets a maximum amount on daily standing charges.
While individual units and standing charges are capped, this means there’s no upper limit on the amount you actually end up paying. Your total bill depends on the amount of energy you use. The more you use, the more you pay.
Ofgem mostly uses wholesale energy prices (i.e. the amount energy suppliers pay for electricity and gas) to set the energy price cap. They explained the most recent increase was down to “world events including the conflict in the Middle East” resulting in rising prices.
The energy price cap only applies to standard and default energy tariffs, but most UK households are on this type of tariff anyway.
If you’re on a fixed-term energy contract, the energy price cap doesn’t apply. It also doesn’t apply to anyone using a prepayment meter. If you’re prepaying for your energy, you still get a small discount on your daily standing charge though. This is set under the government’s Energy Price Guarantee.
If you’re unsure whether your contract falls under the energy price cap, talk to your supplier. They’ll confirm your contract type and eligibility.
What does the energy cap mean?
The energy tariff means you won’t pay over a certain amount for each unit of electricity or gas you use. It also means you won’t pay higher than a set amount for daily standing charges.
This means the average person paying by direct debit won’t pay more than:
29 p/kWh for electricity
7 p/kWh for gas
53 p/day for electricity standing charge
30 p/day for gas standing charge
While a standard variable tariff could (hypothetically) be lower than this amount, it can’t be higher. Most energy companies charge the maximum price possible though.
In terms of how this impacts your bills, remember the energy cap is based on typical usage. So when you see £1,928 a year, this isn’t necessarily the amount of money you’ll pay.
Ofgem bases this number on an average domestic customer (using both energy and gas) paying by direct debit.
So this means if you live in a small home and often save your energy, you’ll pay less! On the other hand, if you’re in a big house that you like to keep warm and bright all winter – chances are you’ll pay more.
The exact annual usage Ofgem uses to calculate these figures is 12,000 kWh for gas and 2,900 kWh for electricity.
What is the current energy price cap?
So, what is the new energy price cap?
The current energy price cap is £1,928 for January 2024. This refers to the amount a typical household pays each year.
It rose by 5% from the previous energy price cap of £1,834 in October 2023.
The current energy price cap will remain in place until 31 March 2024.
If you’re wondering what the energy price cap is after this date, we don’t know yet. However, experts predict prices are likely to fall in April 2024. This is because volatile wholesale prices are slowly beginning to settle.
You’ll know for sure on 23 February 2024, when Ofgem announces the April to June price cap.
Why does the energy price cap keep changing?
While we’re on the topic of future energy price caps, you might wonder why the energy price cap doesn’t just stay the same.
Why does it have to change every three months?
Well, this rolling approach lets energy suppliers adjust charges in response to wholesale prices. If the energy price cap remained the same for a whole year, but energy costs skyrocketed, this could put energy companies out of business.
This happened in 2021 when several UK energy companies folded under the pressure of rapidly rising prices.
So why doesn’t the energy price cap change more regularly? Every month perhaps?
Well on the other side of the equation, keeping the price cap steady for a few months helps customers budget their household expenditure.
This means the energy price cap changes in January, April, July and October as standard. Even so, the government retains the right to alter the cap in “exceptional circumstances”.
How is the energy price cap calculated?
The energy cap is calculated based on the operating costs faced by energy companies. Although it’s designed to keep prices fair for customers, the energy cap isn’t based on what people can afford.
So what are these operating costs?
The main one is wholesale prices. This is the amount energy companies pay for electricity and gas. It’s the main factor determining the price per unit you eventually pay.
Fluctuations in wholesale prices (which remain extremely changeable) are the main reason why the energy price cap changes every three months.
There are other factors contributing to the energy price cap too. They include things like maintaining the energy network, with all the wires and pipes needed to transport electricity and gas. It also includes general business costs like staffing and computer systems for customer billing, as well as metering services such as the smart meter rollout.
The impact of government policy also factors into energy cap calculations. For instance, the costs of recent environmental and social schemes such as boiler upgrades, solar panels or saving energy with household insulation contribute to the overall energy price cap.
In summary
The energy price cap sets an upper limit on the amount energy companies can charge customers. It covers the cost per unit of electricity and daily standing charges.
As of January 2024, the energy price cap is £1,928 – which reflects the annual energy bills of an average household using electricity and gas.
If you’re on a standard variable tariff, you don’t pay more than 29 p/kWh for electricity and 7 p/kWh for gas. You also won’t pay more than 53 p/day for electricity standing charges and 30 p/day for gas standing charges.
The energy price cap doesn’t apply to fixed-term energy contacts or those using a prepayment meter. It changes every three months, with the next price cap (covering April to June) set to be announced on 23 February 2024.
