How will Ofgem's new price cap affect your energy bills?

What's happening? Relief is on the way: households will finally pay less for their gas and electricity from Saturday.

The average household energy bill will fall by £426 a year from 1 July when Ofgem reduces its price cap amid tumbling wholesale prices.

The drop in the cap - which sets a limit on the maximum amount suppliers can charge for each unit of gas and electricity used - means bills will be an average £2,074 a year following the previous high of £2,500.

However, this is still well above the average £1,277 we were paying in October 2021, around the time the global gas crisis began and prices started to spiral out of control.

Which? Energy editor Emily Seymour said: “While the new price cap will see typical bills drop by around £500, energy bills will still be almost double the amount they were before the energy crisis began - which will be unaffordable for some households.”

Here, Yahoo News UK explains what is going on with the price cap.

Read more: Energy costs to fall from July 1 but bills still almost double pre-crisis levels (PA Media, 4-min read)

Ofgem's price cap: a recent history

Between October 2021 and March last year, the price cap was £1,277. Amid spiralling wholesale prices, this rose to £1,971 between April and September last year.

Another huge increase was incoming between October and December last year - with the tariff set to reach £3,549. It meant the government was under huge pressure to intervene, so it introduced the Energy Price Guarantee (EPG) which took Ofgem's price cap out of the equation and capped all tariffs at £2,500. This came in addition to the £400 discount given to every home over the winter.

Had it not been for the EPG, and Ofgem’s price cap was used instead, bills could have reached an average £4,279 between January and March this year, and £3,280 between April and June.

However, with wholesale costs having fallen, the price cap has fallen below the £2,500 mark to stand at £2,074 until the end of September, meaning the EPG will no longer be used.

Read more: Households to be more than £400 a year better off as Ofgem energy cap slashed (Evening Standard, 3-min read)

What will happen to the price cap going forward?

The next price cap period is between October and December, with prices expected to drop again - though marginally.

Energy industry consultancy Cornwall Insight has forecast Ofgem will announce price caps of £1,871 a year from October and £1,900 from January.

Chris O’Shea, chief executive of energy giant Centrica, which owns British Gas, also said prices will drop but pointed out they remain significantly above the longer-term average.

“I think the first act of the crisis is over,” he told BBC Radio 4’s Today programme on Friday. "I think what we’ve got to remember is the energy prices had more than doubled before Russia invaded Ukraine.

“Prices are back down to pre-invasion levels but they are 2.5 times the long-run average, and that’s really driven by supply and demand. I think there is a danger that we get complacent because last winter was OK and because prices are stable now.”

Read more: British Gas boss warns UK energy bills are not going to fall any time soon (Yahoo Finance UK, 2-min read)

Warnings from energy groups - 'People are still struggling'

Ahead of the new price cap coming into force, Adam Scorer, chief executive of the charity National Energy Action, warned: “Despite falls in retail prices from July, many of the people we help are still struggling.

“As of tomorrow, two-thirds of households across the UK will no longer benefit from any assistance to offset the impacts of the energy crisis and Ofgem’s price cap will offer limited protection to these households.”

Which? Energy editor Emily Seymour added: “If you are concerned about struggling to pay higher bills, there is help available. Speak to your energy provider about a payment plan you can afford and check to see if you qualify for any government schemes.”

Seymour also said fixed deals “are starting to return to the market for existing customers of some suppliers” though “we wouldn’t recommend fixing anything higher than the unit rates in your current deal or for longer than a year”.

Read more: Energy bills: Why you should check your meter reading this week (Yahoo News UK, 3-min read)

What is the overall cost of living picture?

Energy bills might be starting to fall - though remember, they are still £797 higher than two years ago - but other bills are continuing to increase.

With 2.4 million fixed-rate mortgage deals due to expire before the end of 2024, scores of households are facing huge increases in their mortgage bills after the Bank of England raised its interest rate to 5% - the highest in 15 years - last week as part of its attempt to curb high inflation.

Watch: Bank needed to make ‘strong move’ after inflation report, says governor

There have been warnings 1.4 million mortgage holders will lose at least a fifth of their disposable income to additional repayments. These are set to rise by £2,900 for the average household remortgaging next year, according to economists at the Resolution Foundation.

Food inflation, meanwhile, is currently 18.3%, with Confederation of British Industry lead economist Alpesh Paleja warning “the ongoing strength in food price inflation means that many will have to keep tightening their belts for some time”.

Read more: Scale of ‘mortgage time bomb’ revealed as mortgage holders paid rates of just 2.82% in May (Evening Standard, 2-min read)