What is the energy price cap?

Ofgem updates the maximum charges allowed under the cap twice a year – known as the summer and winter price caps. The summer price cap is announced in February (it'll be confirmed on 7 February in 2022), and the new rates take effect on 1 April. The winter price cap is announced in August, with the new rates taking effect on 1 October.

The price cap changes are largely based on the costs suppliers face for providing energy – though there are a number of other factors that affect the cap.

The price cap applies to 'default' tariffs – ones you don't actively choose to switch to – whether you pay by direct debit, cash or cheque, or prepayment. These tariffs are generally known as standard variable tariffs (SVTs), and you'll be on one if:

• You've never switched your energy tariff. You would have always been on your supplier's standard tariff, so you will be protected by the price cap.
  
  
• You were on a fixed deal, but haven't chosen to switch again. If you have previously chosen a fixed deal, once the fix period ends you will be automatically rolled on to to a price-capped tariff if you do nothing.
  
  
• You were with a supplier that has gone bust. In most cases, if your supplier has gone bust (as more than 20 firms have in recent months), your existing tariff with that supplier will end, and Ofgem will pick a new supplier to take over. Your new tariff with the new supplier will be protected by the price cap.
  
  In the past, we have seen some providers offering rates lower than the price cap when taking on customers from failed suppliers (such as when EDF took on Green Network Energy customers) – but this is unusual, and very unlikely right now due to record wholesale prices. Regardless of what rate you're offered, you can't be charged more than the price cap when being moved from a failed supplier.
  
  
• You're moving home. Usually when you move home, your current tariff will end when you let your supplier know you're moving out (a few do let you transfer fixed deals, so do check).
  
  You'll then need to contact the existing supplier of the property you're moving into, to let them know when you moved in and to set you up with a new account. From the date you moved in, you'll be placed on a 'default' tariff, which is controlled by the price cap.
  

The price cap doesn't apply to any fixed deals on the market, or to any standard variable tariffs that have an exemption to the price cap (this is only for very green deals, and you still have to choose to be on them).

The price cap is calculated based on a range of costs energy suppliers face. The largest cost is wholesale energy – what energy suppliers pay for gas and electricity. This accounts for about 41% of a typical bill for a tariff priced at the maximum allowed under the current price cap.

It's also what causes most of the change to the price cap every six months, as wholesale prices are constantly fluctuating.

Other elements include things such as the costs of maintaining the pipes and wires that carry gas and electricity, or the operating costs suppliers face for billing customers and providing metering services. See the full list below.

Ofgem can also add on any unexpected costs to the price cap

There's also what's known as an 'adjustment allowance', which allows Ofgem to factor any special, unexpected costs into the price – for example, during the pandemic Ofgem included a £24 per customer allowance in the cap to cover the economic fallout.

It is also expected that Ofgem will add in the costs resulting from all of the suppliers that have failed in recent months. We won't know how much this will exactly be until the regulator announces the next rates in February, but it has been estimated at between £60-£100.

Other costs include network, operating and policy costs

Other than wholesale energy costs and the special adjustment allowances, the price cap is also made up of the following:  

• Network costs. This is the costs suppliers face for building, maintaining and operating the pipes and wires that carry energy to households. It accounts for about 21% of a typical bill under the current price cap.
  
  
• Operating costs. This covers the cost of billing and metering services, including the cost of the smart meter rollout. It accounts for about 16% of the current price cap on typical use.
  
  
• Policy costs. This is to support Government environmental and social schemes to help households save energy, to reduce emissions and to encourage homes to get solar panels and similar renewable energy tech. It accounts for about 13% of a typical bill under the current price cap.
  
  
• VAT. For energy, this is set at 5%, which is added to the price of all tariff rates. This is about 5% of a typical bill.
  
  
• Earnings. This is the part of the bill that is profit for a supplier – Ofgem says it allows for a 'fair rate of return' for suppliers. It accounts for 2% of a typical bill under the price cap.
  
  
• Payment method allowance. This is to cover the cost of taking monthly direct debits, billing people quarterly by cash, cheque or direct debit, or billing by prepayment. How much this is depends on the payment method – for those on the monthly direct debit cap, it's just 1%. For those paying by quarterly direct debit, cash or cheque, it's 7%.
  
  
• Other costs. There are a few other small costs Ofgem accounts for, such as what's known as a 'headroom allowance', which is supposed to help with any unexpected costs.