Ofgem's energy price cap dictates the level at which energy prices are set. So what does this mean for our energy bills?
The energy price cap has now been set at £1,717 as of 1 October with millions now expected to pay more for their energy bills(Image credit: Getty Images)
The energy price cap, which limits the amount energy companies can charge households for their energy bills, has risen to £1,717 as of October 1st 2024.
The announcement comes as part of Ofgem's quarterly update to the energy price cap with millions of UK homeowners left searching for energy saving tips.
Here’s what you need to know, including what the energy price cap is, who it affects, and what Ofgem’s future updates will mean for our energy bills.
Energy price cap explained
The energy price cap was originally introduced by the Government in 2019 to limit how much firms can charge consumers for their energy, and ensure households on default tariffs pay fair gas and electricity prices.
However, energy price rises in Europe has put a spanner in the works and Ofgem has needed to increase the energy price cap to stop energy companies going bust.
The scheme was replaced last year by the introduction of the Energy Price Guarantee which capped bills at £2,500, but this reverted back to the energy price cap and has not been reintroduced.
What is the current level of the energy price cap?
The current energy price cap is set at £1,717 per year for a typical household, an increase of 10% to the rate set between July and September (£1,568).
This rise will remain until 31 December 2024 when a new rate will be set.
Who does the energy price cap affect?
The energy price cap affects the energy bills of around 23 million households in England, Wales and Scotland. Variable energy tariffs are governed by the energy price cap, whether you pay by direct debit, standard credit or a prepayment meter.
It does not apply if you are on a fixed-term energy tariff or a standard variable green energy tariff as this is exempt.
Does the energy price cap cap my energy bills?
In short, no. The energy price cap is not designed to limit consumer energy bills, but rather a cap on how much suppliers can charge per kWh of energy use, plus a maximum daily standing charge. As such, households are still charged for how much electricity and gas they use — this is not capped.
That said, the rates charged per kWh (kilowatt-hour) and standing charges are only capped to a degree as they vary per region. This is due to the difference in network charges across the UK, plus it reflects how much it costs to transport energy to where you live.
The current maximum rate for electricity is 24.5p per kWhand for gas, it is 6.24p per kWh. When standing charges are added – they are capped at 60.99p a day for electricity and 31.66p for gas. Although, these rates do vary by region.
When is the energy price cap set?
Prior to August 2022, the energy price cap was updated every six months, but surging energy price rises led Ofgem to announce that it would be updated quarterly, which it said would help to bring stability to the energy market and reduce price shocks for consumers.
It is now adjusted in January, April, July, and October each year.
The energy price cap is reviewed on a quarterly basis to protect energy firms from going bust(Image credit: Getty Images)
How does Ofgem calculate the energy price cap?
The wholesale market price of gas and electricity plays the biggest role in how the price cap is calculated. Ofgem uses these figures to assess how much it costs energy suppliers to buy energy from the market, and how much consumers can pay.
The price cap is then updated to reflect how much it would cost energy suppliers to provide energy for an average home.
Why is the energy price cap so high?
The first energy price cap was introduced in January 2019, set at £1,137, with a prepayment cap of £1,138. By October 2021, the typical annual bill had risen slightly to £1,277.
However, energy prices began to climb significantly in 2021 due to various factors, including extended winters in Asia and Europe and the reopening of economies post-COVID-19, which depleted gas reserves.
The situation worsened with Russia’s invasion of Ukraine in 2022. Although the UK gets less than 5% of its gas from Russia, the conflict caused global instability and led to Europe reducing its Russian gas imports, driving up wholesale prices.
Before the conflict, the wholesale gas price was £1.97 per therm in February, but by mid-August 2022, it surged by 180% to £5.56 per therm. This increase in gas prices also impacted electricity costs, which rose from £1.88/MWh in February to £618/MWh by August, a 235% jump.
The sharp rise in costs has led to the collapse of around 40 energy suppliers since 2021.
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News Editor Joseph has previously written for Today’s Media and Chambers & Partners, focusing on news for conveyancers and industry professionals. Joseph has just started his own self build project, building his own home on his family’s farm with planning permission for a timber frame, three-bedroom house in a one-acre field. The foundation work has already begun and he hopes to have the home built in the next year. Prior to this he renovated his family's home as well as doing several DIY projects, including installing a shower, building sheds, and livestock fences and shelters for the farm’s animals. Outside of homebuilding, Joseph loves rugby and has written for Rugby World, the world’s largest rugby magazine.
