What is the Ofgem energy price cap, and how is it different to the price guarantee?

What is the Ofgem energy price cap, and how is it different to the price guarantee?

Energy bill support has been extended in the form of the energy price guarantee for another three months.

The Chancellor’s extension of the energy price guarantee (EPG) at £2,500 means households won’t feel the full force of Ofgem’s price cap between April and June – which stands at £3,280 – supporting consumers into the summer.

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, 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 to the energy price guarantee?

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

The EPG (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 will remain at £2,500 for three months, the Treasury announced on March 15. As a result, dual-fuel rates will remain steady through July, even though users will continue to pay nearly twice as much as they did two years ago.

It applies to all households in England, Scotland and Wales, with “the same level of support” in Northern Ireland.

How much will you pay?

Under the Government’s EPG, a household using a typical amount of gas and electricity is paying £2,500 a year for energy. Without government support, that annual bill would have been £4,279 since January.

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.

It limits the amount paid by domestic customers to 34p per kWh for electricity and 10.3p per kWh for gas – £2,500 a year for a typical household, although the total depends on your usage.

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

The Government picks up the difference between Ofgem’s price cap and the guarantee but this support will be cut back from April, meaning the average bill rises to £3,000.

Ofgem’s price cap is currently £4,279 per year for the average household, meaning the Government has been paying an average of about £1,779 per year to energy suppliers for every household between September and March.

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.