Ofgem’s energy price cap – what does it mean for household bills?

Despite falling wholesale energy prices making their way through to bills, households are still facing eye-watering costs that remain around 50% higher than two years ago.

What is Ofgem’s price cap and what does it all mean for household bills?

– What is Ofgem’s price cap?

The energy price cap was introduced by the Government in January 2019 and sets a maximum price that energy suppliers can charge consumers in England, Scotland and Wales for each kilowatt hour (kWh) of energy they use.

Energy price cap: default tariff
(PA Graphics)

It aims to ensure that prices for customers on default energy tariffs are a fair reflection of the cost paid by suppliers for wholesale energy, and that the profit firms make is capped.

Ofgem sets its cap every three months as the average amount paid by the typical household.

It is important to note though that Ofgem’s cap does not set a maximum amount for the actual bill households receive – those who use more than the average amount will pay more, and those who use less will pay less.

Energy is regulated separately in Northern Ireland, where the Utility Regulator has begun a regular review of prices.

– Why is Ofgem’s price cap falling?

The fall reflects recent drops in wholesale energy prices – the amount energy firms pay for gas and electricity before supplying it to households.

Last winter, the average household energy bill was £2,500 per year, thanks to the Government’s separate Energy Price Guarantee scheme.

Energy bill support
Lower wholesale prices are not always passed on to consumers (Danny Lawson/PA)

However, households were also getting £66 per month taken off their bills by the Government.

The average household was therefore paying around £141 per month after the discount over the winter months if they were on a direct debit payment plan.

– What is this winter looking like in terms of energy bills?

If the forecasts are accurate, households using the same amount of energy this winter will be paying around £160 per month.

Consultancy firm Cornwall Insight currently believes the typical bill will rise again in January by around £150 a year.

It does not expect energy prices to return to pre-Covid levels before the end of the decade at the earliest.

And it warned that prices remain subject to wholesale market volatility, with the UK’s reliance on energy imports meaning that geopolitical incidents could continue to have a significant impact.

Citizens Advice has also warned that the average household can actually expect to pay slightly more in the coming winter than they did between January and March 2023 if current forecasts hold.

Its research suggests disabled people, single parents and low-income households earning less than £29,000 will be the hardest hit this winter.

Citizens Advice is calling on the Government to do more to help people on the lowest incomes, such as providing additional support through the Warm Home Discount.

Infected Blood Inquiry
Chancellor Jeremy Hunt said in the spring Budget that energy costs for prepayment households would be brought in line with those who pay by direct debit (Jordan Pettitt/PA)

– Will the falling price cap mean the return of switching?

Cornwall Insight has said it hopes to see the reappearance of more competitive fixed-rate energy tariffs as prices begin to stabilise, meaning it could soon be worthwhile for consumers to consider switching again.

Unlike variable tariffs, they are unaffected by the cap.

Consumer groups and regulators say that could be good news for consumers, but warn that such deals will not suit all circumstances, and anyone who locked into a fixed deal would miss out on falling variable prices.

– What if I’m not on a standard default tariff?

Chancellor Jeremy Hunt confirmed in the spring Budget that energy costs for prepayment households would be brought in line with those who pay by direct debit.

This means the cap is the same for both forms of payment.

However, those who pay via cash, cheque or bank transfer, usually every three months, will pay significantly more.