Business Briefing

Explained: what is the energy price cap and when will it increase?

Ofgem announces a record 54% rise in energy bills for 22m households 

Energy regulator Ofgem has confirmed that the energy price cap will increase by a record 54% on 1 April. It’s another financial blow to millions of UK households who are affected by the cost of living crisis. 

Ofgem’s price cap on an average bill will rise £693 for approximately 22m customers. Those on default tariffs paying by direct debit will see a £693 increase from £1,277 to £1,971 per year and prepayment customers will see an increase of £708 from £1,309 to £2,017.

The increase has been driven by a “record rise in global gas prices” over the last six months, with wholesale prices quadrupling in the last year, Ofgem said in a statement. The energy market has faced “a huge challenge” due to the unprecedented increase in global gas prices – “a once in a 30-year event”.

The energy price cap is reviewed twice a year, with changes taking effect on 1 April and 1 October. When the cap is next reviewed in October, prices are “expected to rise again”, the BBC reported.  

What is the energy price cap?

Every six months, the energy regulator Ofgem reviews the maximum price that suppliers in England, Wales and Scotland can charge domestic customers on a standard – or default – tariff, the Daily Express reported. This is otherwise referred to as the “energy price cap”.

Introduced in 2019, the cap sets the maximum price that energy companies can charge per kWh of gas and electricity, known as the unit rate, as well as the cost of getting power into your home, known as the standing charge. It serves as a cap on only the most expensive tariffs, and is designed to protect “those who are unaware of or are unsure of how to switch to a new deal or provider in order to save money”, the i news site said.

Millions of households have opted for default standard variable tariffs that are covered by the cap when their previous fixed-price deals have ended, “because there are no longer any cheaper fixed deals on offer”, The Times said. Standard variable tariffs will be capped at £1,971 a year from 1 April.

Calling it a “price cap” is a “misnomer”, said Martin Lewis, founder of MoneySavingExpert.com. “There’s no max you pay for energy, think of it more as a cap on the cost of each unit of gas and electricity.”

How is the price cap reviewed? 

Ofgem sets the price cap based on a “broad estimate” of how much it costs a supplier to provide gas and electricity services to a customer, The Telegraph explained.

The calculation is made up of “wholesale energy costs, network costs such as maintaining pipes and wires, policy costs including government social and environmental schemes”, the paper added. “Operating costs, such as billing and metering services, and VAT” are also thrown into the mix.

It also applies to customers on a standard variable tariff, meaning that if consumers have never switched energy firms, or switched more than a year ago, they have most likely defaulted to the energy company’s standard tariff. 

What was the price cap review in 2021?

Last year, the energy price cap increased twice, rising to £1,138 from 1 April, followed by a 12% increase on 1 October to £1,277. The second increase saw it reach its “highest point ever”, i news said.

The increase was mostly due to rising wholesale energy prices, so Ofgem allowed energy companies to charge higher prices. Ofgem indicated it could review how the energy price cap works in light of the wholesale gas crisis, which could result in reform of “how it is calculated and how frequently it can be adjusted”, The Telegraph reported.

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