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What is the Ofgem energy price cap and when will it change next?

 (PA)
(PA)

Ofgem is due to announce its next energy price adjustment this week, and many are wondering whether it’ll mean paying even more to keep homes warm.

Some predictions have suggested energy price cap may fall in the next adjustment because it rose so dramatically last time.

The industry regulator raised the cap on gas and electricity prices by five per cent in January, with the annual dual fuel bill for the average household rising by £94.

However, other news doesn’t sound as promising. The chief executive of research firm Cornwall Insight, Dr Craig Lowrey, said things could get worse for bill payers.

"As we move through 2024, it's not just the persistently high unit costs that will be a worry; the looming rise in electricity standing charges from April adds another layer to the equation," Dr Lowrey said.

The next energy price cap adjustment will be announced on February 23 and will come into effect on April 1.

Before the upcoming announcement, here’s everything you need to know about who sets the energy price cap and how it works.

Households are struggling to manage household bills (PA Archive)
Households are struggling to manage household bills (PA Archive)

What is the energy price cap and what is Ofgem?

Ofgem, the Office of Gas and Electricity Markets, is the independent regulator of the British energy market and is intended 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 because of the 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 a 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 said: “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.”

How is this different from the energy price guarantee?

After prices soared following Russia’s invasion of Ukraine in February 2022, the Government announced a lower energy price guarantee would temporarily replace the cap.

The energy price guarantee (EPG) — which is different from Ofgem’s cap — sets a maximum price per unit for gas and electricity and pays any costs associated with a bill that is more than that amount. Long-term support for homes has been demanded by charities including Citizens Advice and National Energy Action.

The EPG, which set the typical yearly energy bill at £2,500, ended in July.

How much will you pay?

The average energy bill for people paying by direct debit decreased by £426 in July last year when the Ofgem price cap was reinstated. It was then reduced by a further £151, bringing the average annual cost to £1,923; however, this depended on your consumption.

Until the next energy price adjustment is announced in February, there won’t be much change to what you currently pay.

How does the energy price cap work?

The energy price cap 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 is not the maximum possible cost to a household because, if you burn a higher number of units, your energy bills will exceed the cap. If you use less, you’ll pay less.

Ofgem’s price cap is £1,928 per year for the average household.

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 whether you pay by a monthly or quarterly direct debit, on the receipt of a bill or prepay for your energy.