Ofgem’s Energy Price Cap Explained

1 April 2022 sees the start of a new energy price cap. But what is the price cap exactly, who sets it (and when), and – most importantly – how can it affect your energy bills? We have the answers to these questions and more…

What is the energy price cap?

The cap is the maximum amount that energy suppliers are permitted to charge per kWh of gas and electricity (known as the ‘unit rate’) per year. It also incorporates a maximum daily standing charge which is the cost of actually getting the power to your home.

The price cap only applies only to domestic energy customers paying standard variable rate energy tariffs (SVTs) – also known as ‘default’ tariffs. So those with a fixed-rate energy tariff are not affected by it.

The figure quoted for the SVT price cap – £1,971 from 1 April 2022, up from £1,277 –  is calculated for an average household’s energy consumption. Households using less or more energy will see their bills capped at different amounts as the cap applies to the price of each unit used.

And it’s important to remember that the cap does not limit the amount you will pay. You pay a capped price for each unit, so the amount you consume will determine the size of your bill.

Who sets the cap and when?

The energy price cap is reviewed and set by market regulator Ofgem twice a year. It is announced in February and August and takes effect on 1 October and 1 April respectively. It was first introduced in 2019, a cap already being in place for customers on repayment meters (more on this below).

In response to fluctuations in wholesale gas prices, Ofgem has acquired the ability to update the price cap more frequently than once every six months in exceptional circumstances to ensure that it still reflects the true cost of supplying energy.

How does it affect my bills?

Naturally, when each new price cap is announced, most energy suppliers go about adjusting the cost of their SVTs to the same or similar level as the cap.

How much is the cap?

From 1 April 2022, the energy price cap is set at £1,971 a year, which is a whopping 54% (£693) rise on October’s cap of £1,277. The new prepayment meter tariff cap is £2,017, which is £708 higher than the previous level of £1,309.

Bear in mind these figures are based on the maximum unit price of energy charged to a SVT household consuming an average amount of energy. It’s not the maximum amount every household will pay. If you burn a higher number of units than the average, your annual energy bills will be greater than this figure.

Note that the price cap can vary depending where you live. This is due to varying costs for transporting energy across the energy network to the region you live in.

How do I avoid paying the cap?

Traditionally, you could avoid paying the cap by ensuring you’re always on a fixed rate energy tariff. It’s always been easy to compare energy tariffs at a comparison website and switching supplier has normally been quick and hassle-free.

However, we find ourselves in the midst of an energy crisis, with the rising cost of wholesale gas pushing prices far above the level of the 2021 cap. This means it’s currently nigh-on impossible to get a fixed rate energy tariff that’s cheaper than the cap.

This may change when the new, higher cap takes effect in April 2022 as there may be scope for suppliers to undercut it with cheaper fixed rate tariffs.

Why can’t I find a cheap fixed-rate energy tariff?

Since the start of 2021, wholesale energy prices have rocketed by more than 250%, which has forced many smaller energy firms out of business. And those remaining have pulled all of their cheaper fixed rate energy tariffs, or are offering them at costs way above the price of the cap.

What should I do about my energy bills?

This means that, unusually, it currently makes sense to stick with your SVT – whether you are paying it now, or you are about to fall onto it when your existing fixed rate tariff ends.

The price cap in place until the end of March (£1,277) and the new cap from 1 April (£1,971) is the maximum you will pay, at least until the price cap is reviewed again later in the year.

How has the energy price cap changed?

Energy price caps have dipped and risen since 2019. Here is a timeline of how they have changed:

• 1 January to 31 March 2019. The first cap level was set at £1,137 for a typical default/SVT tariff customer – a dual fuel single rate customer paying by direct debit using a typical amount of energy. An existing prepayment meter cap remained at £1,136 for a dual fuel single rate customer using a typical amount of energy
• 1 April to 31 September 2019 the default tariff cap rose by £117 to £1,254 per year and the prepayment meter cap by £106 to £1,242 per year
• 1 October 2019 – 31 March 2020 the level of the default tariff cap fell to £1,179 and the prepayment meter cap to £1,217
• 1 April 2020 – 31 September 2020 the level of the default tariff cap fell further to £1,162 and the prepayment meter cap also decreased to £1,200
• 1 October 2020 – 31 March 2021 the default tariff cap fell to £1,042 and the prepayment meter cap fell to £1,070
• 1 April 2021 – 30 September 2021 the default tariff cap rose to £1,138 while the prepayment meter cap rose to £1,156
• 1 October 2021 – 31 March 2022 the default tariff cap rose by £139 to £1,277 while the prepayment meter tariff cap rose by £153 to £1,309
• 1 April 2022 – 30 September 2022* the default tariff cap rose by £693 to £1,971 while the prepayment meter tariff cap rose by £708 to £2,017. *Ofgem may decide to change it ahead of this date if exceptional market circumstances are deemed to make such a move necessary.

Is there a cap for prepayment meters?

Yes, there is a separate cap for those on prepayment tariffs (an estimated four million households).

The cap was introduced in April 2017 and, as with the default tariff price cap, it means suppliers cannot set their prices for units of energy above a stated level.

The prepayment cap is also reviewed every six months, in April and October. As noted above, it will increase to £2,017 on 1 April 2022.

Ofgem rolled the prepayment meter cap into the default tariff cap last year so it could be extended beyond the end of 2020. The government has also extended the general price cap throughout 2022. 

At present, the cap is scheduled to be lifted regardless in 2023.