The ultimate guide to the energy price cap
The UK is in the grip of the energy crisis. Every day the news is filled with dire warnings about the effect of rising prices on the cost of living.
The energy price cap used to be just another obscure Ofgem regulation, but it now sits at the heart of the energy crisis. On 30 June 2023, the Energy Price Guarantee ended, returning the energy price cap to its usual role of limiting domestic energy bills.
This guide explores everything you need to know about the energy price cap.
Use our 👉 Energy Price Cap finder 👈to know the exact electricity and gas price cap rates that apply to your home!
What is the energy price cap?
The energy price cap limits how much suppliers can charge for electricity and gas under standard variable tariffs.
In 2022, the conflict in Ukraine caused the real cost of energy to soar. The knock-on impact is that the cheapest tariffs available in the market are the standard variable tariff protected by the price cap.
The current price cap is £1,834 per year for the average household until December, but it will rise 5% to £1,928 per year from the start of next year.
Why is the energy price cap so expensive?
The energy price cap is rising to reflect the actual cost of supplying electricity and gas to homes.
Here’s our brief outline of the events that have caused the price of energy to skyrocket in Britain:
- Since the early 1990s, the natural gas output of the North Sea has declined, making Britain dependent on importing gas from Europe.
- In 2017 the UK government decided to remove most of Britain’s gas storage capacity.
- On 24 February 2022, Russia invaded Ukraine.
- In support of Ukraine, The UK, Europe, and the US implemented a series of economic sanctions against Russia.
- Responding to the economic sanctions, Russia has gradually reduced the volumes of gas it sells to Europe.
- In the absence of Russian Gas and a lack of alternative supplies, the price of natural gas has soared.
- The UK continues to generate approximately 40% of its electricity by burning natural gas, causing the price of electricity to skyrocket.
What is the current energy price cap?
On 25 August 2023, Ofgem announced the energy price cap relating from September to December 2023 of £1,834 annually for customers on a default tariff.
The typical energy unit price during this period is:
Electricity: 27.3/kWh plus a daily standing charge of 53p.
Gas: 6.9p/kWh plus a daily standing charge of 30p.
Note that the exact price cap rates depend on your home’s (1) location and (2) payment method. Enter these into our finder below to find the exact price cap rates that apply to you 👇
Energy Price Cap finder 🔍
History of the consumer price cap
Teresa May’s Conservative Government enacted the consumer price cap in early 2018. The Domestic Gas and Electric (Tariff Cap) bill was adopted by parliament, requiring that Ofgem imposes a maximum price on poor-value energy tariffs.
The government’s analysis found that approximately 11 million households across Britain were paying over £300 more each year compared to the cheapest tariffs available.
The overcharging of consumers occurs when customers stay with the same energy supplier for many years and are paying the uncompetitive standard variable energy tariff. The bill imposes a maximum price that can be charged under the standard variable tariff.
The bill was expected to reduce overcharging by energy suppliers by £1.4 billion each year.
How is the energy price cap calculated?
The price cap tariff bill requires that Ofgem apply the cap at a rate that will continue to enable suppliers to compete effectively and encourage customers to compare energy suppliers and switch to the most competitive tariffs.
The energy price cap is calculated to be the underlying cost to supply electricity or gas plus an allowance for the profit of the energy suppliers.
Here’s a breakdown of the separate costs incurred by energy suppliers included within the price cap:
- Wholesale energy – The price the supplier pays for the electricity and gas based upon forward rates available on the market. Check out our guide to the latest wholesale energy prices.
- Network costs – The cost of moving energy through the national grid, local electricity distribution network and local gas distribution networks to deliver to individual household customers.
- Policy costs – The cost of the government’s social and environmental policies, including the emissions trading scheme.
- Operating costs – The cost of being an energy supplier, including providing energy meters, a customer services department and producing energy bills.
- Payment collection costs – The cost of collecting money from customers. The allowance is slightly different depending on whether you pay by direct debit, BACS or prepayment.
- VAT – An additional 5% consumer tax levied on all household bills.
Exemptions from the energy price cap
Renewable energy tariffs
Renewable energy tariffs are exempt from the energy price cap. Ofgem recognises that renewable energy tariffs that use entirely renewable energy generation inevitably incur more costs than fossil fuel-based energy supply.
Ofgem grants the green exemption on a supplier-by-supplier basis and only when they are satisfied that the tariff encourages renewable energy production.
The effect of the price cap on comparing energy suppliers
Since the winter of 2022, the market for comparing energy suppliers has frozen. If you visit an energy comparison site, you’ll be greeted with a message that recommends that you do not switch energy suppliers.
So what is going on?
The typical situation in the energy market is that suppliers’ fixed-rate deals are cheaper than the default standard variable tariff. This means people can save hundreds of pounds by comparing and switching to the most competitive fixed tariffs in the market.
Currently, however, the energy costs paid by suppliers have risen above the price cap. This means that suppliers’ fixed-rate energy tariffs are more expensive than the default, standard variable tariffs protected by the price cap.
In July 2023, there were the first tentative signs of suppliers offering cheaper fixed-rate tariffs. Check out our guide to should I fix my energy prices until 2024?
How often is the energy price cap updated?
On the 4th of August 2022, Ofgem announced that the energy price cap would be updated quarterly rather than bi-annually.
The decision to change the energy price cap more regularly was made to reflect increased volatility in energy prices. The energy price cap needs to reflect the actual costs incurred by suppliers, or it will cause more energy supplier bankruptcies.
The quarterly updates occur on 1 April, 1 July, 1 October and 1 January, with the pricing methodology announced approximately a month in advance. The quarterly updates are designed so that customers are paying the real cost of energy.
Who is protected by the energy price cap?
As of November 2023, the vast majority of households are paying standard variable tariffs protected by the price cap.
Since you can’t save money by switching energy suppliers, more households are coming to the end of their fixed rate tariff and rolling onto the default standard variable tariffs protected by the energy price cap.
This situation means that the price cap effectively determines the price most households are paying for energy. In the current times of high inflation, this makes the energy price cap announcement very important for the finances of houses.
Criticisms of the energy price cap
The price cap legislation was designed to stop suppliers from charging too much on those households on a standard variable tariff.
Today, the energy price cap is not serving this function; instead, it is artificially holding energy bills below the real cost of energy. It’s also removing the incentive for households to compare and switch energy suppliers, meaning that the deregulated energy market is not functioning as designed.
Government support packages
The actual price of delivering electricity and gas to homes has approximately doubled between 2020 and now. Here’s our in-depth analysis explaining why this happened:
We’ve also produced a helpful guide to the support available to households struggling to pay energy bills.
Does the price cap apply to businesses?
The energy price cap only applies to the household market for energy.
In these times of rising energy prices, it’s therefore essential that businesses are shopping around for the best available deals.
Please note that businesses are currently receiving temporary government support through the energy bill discount scheme.
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