Home Money What is the energy price cap and how will a cut affect your bills?

What is the energy price cap and how will a cut affect your bills?

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What is the energy price cap and how will a cut affect your bills?

Changes to Ofgem’s energy price cap will impact the gas and electricity bills paid by millions of homeowners.

The average capped price bill from energy regulator Ofgem, currently £1,928 per year, will fall to £1,690 per year from April 1.

In practice, this means that a household using the typical amount of energy will see their bills fall by around £238 per year – at least until Ofgem next adjusts its price cap in July 2024.

Ofgem said gas and electricity bills would fall to their lowest levels in two years, but were still very high by historical standards.

This is everything you need to know about the Ofgem price cap and how it affects energy bills.

What is the energy price cap and how will a

What is the Ofgem price cap?

The price cap is a limit, set by Ofgem, that limits the maximum amount an energy company can charge for the units of gas and electricity consumers use.

It also limits how much households pay in fixed costs: the daily costs that are paid regardless of how much energy is used.

The price cap was introduced in January 2019 to prevent energy companies from overcharging customers for variable rates.

As cheap fixed rate deals have all but disappeared, almost all homes are now subject to rates regulated by the Ofgem price cap.

How does the price ceiling affect my energy bill?

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Why have I seen two figures for the Ofgem price cap?

  • There are two figures for average energy consumption for the October 1st price cap: £1,923 and £1,834
  • The reason is that from October 1, Ofgem has changed not only the price cap, but also what it calls the average energy consumption
  • This is because consumers have used less energy than the regulator thought
  • Based on the old assumptions, the price ceiling fell from £2,074 per year to £1,923 on October 1
  • The £1,834 figure is much lower than £1,923, but doesn’t mean consumers will magically be charged that much less than before

This depends on the type of tariff you have, your meter and how much energy you use.

From April 1, the average variable-rate household paying by direct debit will pay £1,690 a year for gas and electricity, or £140.83 a month in energy due to the price cap.

For those who have a prepayment meter, average bills will fall from £1,917 now to £1,643 from January 2024 – a drop of £274.

Customers who pay their bills with standard credit will see bills range from €2,058 to €1,796 for normal energy consumption.

But exactly how much you pay depends on your energy consumption. This is because the price cap only limits the maximum you can be charged for the units of gas or electricity you use. The more units you use, the more you pay, and vice versa.

However, any home that uses more than £3,000 of energy a year will no longer benefit from the government’s Energy Price Guarantee from March 31.

This is a government scheme whereby the state covers part of the gas and electricity bills for consumers.

It launched at the £2,500 level in October 2022 and was increased to £3,000 in July 2023, but expires on March 31.

How does the price ceiling affect fixed costs?

The Ofgem price cap also regulates fixed costs.

The amount of the standing charge varies depending on factors such as where you live in the country.

Remains: Households are confronted with high fixed costs, regardless of energy consumption

Remains: Households are confronted with high fixed costs, regardless of energy consumption

Remains: Households are confronted with high fixed costs, regardless of energy consumption

For electricity, the average standing charge is 53p per day and will rise to 60.1p from April 1.

For gas, the typical standing charge will increase from 30 cents to 31.4 cents.

Where are all the cheap energy deals?

Historically, most households have been locked into fixed energy contracts. Variable rate customers have been left with the choice after these cheaper fixed rate deals expired.

But that all changed at the end of 2021, when energy companies stopped offering cheap fixed-rate deals.

They did this because of the energy price crisis, when wholesale gas prices started to rise.

Because most consumers had fixed rates, energy companies were forced to buy electricity for much less than they could sell it for.

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As a result, dozens of energy companies went bankrupt and the rest waited for customers to land on more expensive deals with variable rates.

Most of the country now has a variable rate energy tariff, with prices determined by the Ofgem price cap.

Almost all energy company rates charge customers the maximum allowed under this cap.

Energy companies have slowly started to bring back fixed-rate deals, but few come out cheaper than customers will pay while stuck with a capped price.

For this reason, Ofgem has urged consumers to be wary when taking out a fixed rate contract.

What is the future of the price ceiling?

Ofgem does not normally make predictions on how the price cap will change, although chief executive Jonathan Brearley previously warned that energy was likely to be expensive throughout the winter.

But longer-term forecasts are available from analysts at Cornwall Insight, which has predicted all previous price cap movements quite accurately.

Cornwall Insight believes the average capped price gas and electricity bill will fall again to £1,465.07 in July, before rising to £1,523.95 in October.

But the existence of the price ceiling itself is up for debate – at least in its current form.

The price cap has come under fire from several critics, including Ofgem itself.

Earlier this year, Ofgem chief executive Jonathan Brearley said the price cap needed to be shaken up because it was “broad and crude” and might not work well for consumers.

Because most households now pay capped bills, they have little incentive to switch providers because they would end up paying the same.

In April 2024, Ofgem unveiled plans to completely shake up the price cap.

These plans include limiting the profits energy companies can make on more expensive capped rates – or even eliminating them altogether.

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