What is the new energy-price guarantee, how does it work, and when will it change?

What is the new energy-price guarantee, how does it work, and when will it change?

From January, energy providers will be able to charge more for gas and electricity under the new Office of Gas and Electricity Markets (Ofgem) energy price cap, but households will be protected from the increase.

The Ofgem energy price cap will rise to £4,279 in January but households will be shielded by Government’s Energy Price Guarantee, meaning what you pay shouldn’t change substantially.

Under the former prime minister Liz Truss’s flagship plan to deal with soaring household bills, the existing energy-price cap would have been replaced with an “energy-price guarantee”. The Government would have paid energy suppliers to cover the shortfall with market prices from October 1.

In his November 17 Autumn Statement, Chancellor Jeremy Hunt announced the energy-price guarantee would continue until April next year.

Here’s everything you need to know about who sets the energy-price cap and how it works.

What is the energy-price cap and what is Ofgem?

Ofgem is the independent regulator of the British energy market and is designed to protect customers.

A key part of its role is to set a limit — a price cap — on what energy firms charge customers on default or standard and variable tariffs.

The price cap was launched in January 2019 by the regulator and, although it was originally a temporary measure, it has remained in place due to the ongoing problems in the industry.

The cap applies if you’re on a default energy tariff, whether you’re paying via direct debit, standard credit, or prepayment meter. It doesn’t apply to a fixed-term tariff.

Previously, variable tariffs had been more expensive than fixed-rate deals. People are often on these tariffs because they fail to switch suppliers when a fixed term has ended or their supplier has been forced to close.

But at present, fixed-term tariffs are more expensive than the cap, meaning the majority of people are affected.

Ofgem says: “The global rises we’re seeing in gas prices mean this is a very challenging time. Right now, this may mean you find few better-value tariffs than being on a supplier’s default rate covered by the Government’s energy-price cap, if you are already on one.”

What is the new energy-price cap from January 2023?

The energy price cap changes every three months. Ofgem announced on Thursday, November 24 the energy price cap would rise by 20 per cent to £4,279 in January 2023.

However, homeowners will be protected from the rise due to the Government's energy price guarantee.

Introduced on October 1, the guarantee limits how much the typical household pays for its wholesale energy, reducing the average annual bill to £2,500.

How does the energy-price cap work?

It works by stipulating a limit on the maximum amount that can be charged for a unit of gas or electricity, based on an estimate of the average household user.

This means that it’s not the maximum possible cost to a household, as if you burn a higher number of units, your energy bills will exceed the cap. Meanwhile, if you use less, you’ll pay less.

A maximum daily standing charge, which is the cost of getting the power to your home, is also included. The cap is determined by the costs faced by energy suppliers.

The cap is made up of network, operating, and policy costs, as well as VAT and earnings. The amount is set differently depending on if you pay by a monthly or quarterly direct debit, on the receipt of a bill, or prepay for your energy.

What about those not on the main grid?

Those living off mains gas or electricity will receive support through a fund called the Alternative Fuel Payment (AFP).

The Government has said that £200 will be applied as a credit to electricity bills. However, it is still not known when this payment will be made to eligible households.

Who sets the energy-price cap?

Ofgem introduced the energy-price cap at the start of 2019, with the aim of preventing millions of households from being overcharged.

It limits what you pay for each unit of gas and electricity while “setting a maximum daily standing charge”, reports MoneySavingExpert.com.

Ofgem’s website states that its role is to “protect consumers by working to deliver a greener, fairer energy system”.