What is the energy price cap and how will a cut affect your bills?

Changes to the Ofgem energy price cap affect the gas and electricity bills paid by millions of homeowners.

Energy regulator Ofgem’s average price-capped bill, currently £1,928 a year, will fall to £1,690 a year from 1 April.

In practice, this means a household using the typical amount of energy will see a fall in in bills of around £238 a year – at least until Ofgem next updates its price cap in July 2024.

Ofgem said gas and electricity bills would fall to their lowest level in two years, but that these still remained historically very high.

This is everything you need to know about the Ofgem price cap and how it affects energy bills.

What is the Ofgem price cap?

The price cap is a limit, set by Ofgem, which caps the maximum amount an energy firm can charge for the units of gas and electricity consumers use.

It also limits how much households pay in standing charges – the daily fees paid regardless of how much energy is used. 

The price cap was introduced in January 2019 to prevent energy firms overcharging customers on variable-rate tariffs.

Because cheap fixed-rate deals have almost disappeared, almost all homes are now on tariffs regulated by the Ofgem price cap. 

How does the price cap affect my energy bills? 

This depends on what sort of tariff you have, your meter and how much energy you use.

From 1 April, the average household on a variable-rate tariff paying by direct debit will pay £1,690 a year for gas and electricity, or £140.83 a month, on energy due to the price cap.

For those on pre-payment meters, average bills will fall from £1,917 now to £1,643 from January 2024 – a £274 drop.

Customers who pay bills by standard credit will see bills going from £2,058 to £1,796 for typical energy use.

But exactly how much you pay will vary depending on your energy use. This is because the price cap only limits the maximum you can be charged for the units of gas or electricity you consume. The more units you use, the more you pay, and vice versa.

However, any home that uses more than £3,000 of energy a year will lose the use of the Government’s Energy Price Guarantee from 31 March.

This is a Government scheme that sees the state pick up some of the tab for consumer gas and electricity bills.

It was launched at the level of £2,500 in October 2022, and was raised to £3,000 in July 2023, but expires on 31 March.

How does the price cap affect standing charges?

The Ofgem price cap also regulates standing charges. 

The level of the standing charge varies depending on factors such as where you live in the country.

For electricity, the average standing charge is 53p a day and will rise to 60.1p from 1 April.

For gas, the typical standing charge will rise from 30p to 31.4p.

Where are all the cheap energy deals? 

Historically, most households have locked in to fixed energy deals. Variable-rate deals have been what customers fell onto once these cheaper fixed-rate deals expired.

But that all changed in late 2021, when energy firms stopped offering cheap fixed-rate deals.

They did this because of the energy price crisis, when wholesale prices of gas began to soar.

Because most consumers were on fixed-rate tariffs, energy firms were forced to buy power for much less than they could sell it for.

As a result, dozens of energy firms collapsed and the rest waited for customers to end up on more expensive variable-rate deals.

Most of the country is now on a variable-rate energy tariff, with prices set by the Ofgem price cap.

Almost all energy firm tariffs charge customers the maximum allowed under this cap. 

Energy firms have slowly started to bring back fixed-rate deals, but few work out cheaper than customers will pay remaining on price-capped rates.

Ofgem has called on consumers to be wary when taking out a fixed-rate deal, for this reason.

What is the future of the price cap?

Ofgem does not normally make predictions about how the price cap will change – although chief executive Jonathan Brearley previously warned energy will likely be expensive throughout this winter.

But longer-range predictions are available from analysts at Cornwall Insight, which has predicted all previous price cap movements fairly accurately.

Cornwall Insight thinks the average price-capped gas and electricity bill will fall again to £1,465.07 in July, before rising to £1,523.95 in October.

But the existence of the price cap itself is in question – at least, in its current form.

The price cap has come under fire from several critics, including Ofgem itself.

Earlier this year Ofgem chief executive Jonathan Brearley said the price cap should be shaken up, saying it was ‘broad and crude’ and might not work well for consumers.

Because most households now pay price-capped bills, they have little incentive to swap to another provider, as they would end up paying the same.

In April 2024 Ofgem unveiled plans to shake up the price cap altogether.

These plans include capping how much profit energy firms can make on more expensive price-capped tariffs – or even scrapping it altogether.