What is the energy price cap?

What is the energy price cap?

How does it work and how much is it?

The energy price cap has increased by a massive 54% in April. Yet with the energy market in crisis, there are still no deals cheaper. As a result, the best option for most right now is to do nothing, and either stay on a capped tariff or move to it when their current deal ends. With so many of us now on or moving to a price-capped tariff, we've had a huge number of questions about it, so we've tried to answer the most common ones in this guide.

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How does the price cap work? How much is it? Plus much more

The price cap was introduced on 1 January 2019 by regulator Ofgem, with the aim of preventing the millions of households on expensive standard or default variable tariffs from being ripped off.

These tariffs, which most people are on (usually if you've never switched, don't switch again after your fix ends, if your provider goes bust or you move home), have traditionally been £100s/year more than the very cheapest tariffs on the market. Yet the market is in crisis right now. Wholesale prices (those firms pay) are at unprecedented highs, so there is nothing meaningfully cheaper than price-capped tariffs.

Ofgem has recently announced plans to change the way the price cap works. It's now set to change the cap every three months from October – for more info, see our Energy price cap set to change MSE News story.

Here's our full Q&A on how it works.

  • The energy price cap has increased by 54% – what are the new unit rates and standing charges?

    The energy price cap rose by an average 54% on Friday 1 April. For a typical household paying by direct debit it's now £1,971/year – up by a massive £693/year, from its previous level of £1,277/year.

    If you're on prepay, the price cap has also increased by 54%, from £1,309/year to £2,017/year on typical use – a rise of £708/year. 

    The rise in the level of the price cap comes as no surprise, and we've been warning of a substantial hike for months due to record gas prices.

    Bear in mind, the new cap level isn't the maximum anyone will pay. The price cap sets a limit on the rates you pay for each unit of gas and electricity, so if you use more, you'll pay more.

    How much is the price cap standing charge and unit rates for gas and electricity in kWh?

    The table below shows the average unit rates per kilowatt hour (kWh) and standing charges per day (it varies by region) under the current cap from 1 April and the previous price cap.

    Average price-capped rates

      New price cap
    (from 1 April 2022)
    Previous price cap 
    (until 31 March 2022)
    Gas 

    Unit rate: 7.37p per kWh
     

    Standing charge: 27.22p per day

    Unit rate: 4.07p per kWh

    Standing charge: 26.12p per day
    Electricity

    Unit rate: 28.34p per kWh
     

    Standing charge: 45.34p per day

    Unit rate: 20.8p per kWh

    Standing charge: 24.88p per day
    Rates and standing charges are averages, which vary by region. Assumes payment by direct debit.
  • Why has the standing charge for electricity nearly doubled from 1 April?

    As you can see from the table above, the standing charge for electricity has risen massively under the new cap from 1 April 2022 – from 24.88p per day to 45.34p.

    With the massive rise in wholesale prices over the last six months or so, mainly caused by an increase in gas prices, many are asking why there is such a heavy hike to the electricity standing charge.

    We asked Ofgem this question, and it told us the rise is due to:

    • The cost of moving everyone whose firm went bust to new suppliers.

    • Increases in fixed network costs (the cost of maintaining the energy networks).

    • An increase in policy costs (such as green levies and the rise in the warm home discount rebate).
  • How does the energy price cap work?

    The price cap sets a limit on the maximum amount suppliers can charge for each unit of gas and electricity you use, and sets a maximum daily standing charge (what you pay to have your home connected to the grid).

    That means there's no upper limit to what you actually pay – if you use more energy, you'll pay more, use less and you'll pay less.

    It only applies to providers' standard and default tariffs, so if you're on a fixed-term energy deal, the cap doesn't apply. If you've not switched in the last year or so, it's likely you're on a capped tariff.
  • How much is the current energy price cap?

    The cap on standard variable and default tariffs is set by regulator Ofgem and is currently priced at £1,971/year on average for a typical household paying by direct debit (after rising 54% on 1 April 2022), or £2,017/year for those on prepay.

    For clarity, this doesn't mean that is what everyone will pay. It's the rates that are capped, so if you use more, you'll pay more.

  • How often does the price cap change?

    Previously, Ofgem updated the energy price cap twice a year. However, it has recently announced plans to update the cap four times a year from October.

    That means – following the next price cap change in October – the cap is set to change in January, April, July and October. For full info, see our Energy price cap to change every three months MSE News story.

    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.

    Do note, it has also given itself the power to change the cap at points during 'exceptional circumstances'.

    Energy price cap timings 

    Price cap period  Date announced Wholesale assessment period
    Current price cap:
    1 April 2022 to 31 October 2022
    4 February 2022 1 August 2021 to 31 January 2022
    October 2022 cap:
    1 October 2022 to 31 December 2022
    26 August 2022 1 February 2022 to 18 August 2022
    (Ofgem will apply certain weightings due to the longer wholesale price observation period and shorter price cap period)

    January 2023 cap:

    1 January 2023 to 31 March 2023

    24 November 2022 1 February 2022 to 16 November 2022 
    (Ofgem will apply certain weightings due to the longer wholesale price observation period and shorter price cap period)
    April 2023 cap: 
    1 April 2023 to 31 June 2023
    27 February 2023  17 November 2022 to 17 February 2023
    July 2023 cap:
    1 July 2023 to 31 September 2023
    26 May 2023 20 February 2023 to 18 May 2023
    October 2023 cap: 
    1 October 2023 to 31 December 2023
    25 August 2023 19 May 2023 to 17 August 2023
    This covers the price cap cycle until the end of 2023. It will likely carry on using a similar pattern as above onwards from 2024. (1) Based on typical annual use for a dual-fuel household paying by direct debit.
  • Is it worth ditching the price cap for a fixed deal?

    While the price cap has just risen by a massive 54%, that will only last until 1 October 2022, before changing again in January. According to the latest predictions from energy analysts Cornwall Insight, we could see a 46% rise on top of the recent 1 April 2022 hike, to about £2,880/year on typical use, before rising again to £2,907/year in January.

    With prices set to rise massively again, we've been inundated with questions from users on whether it's worth ditching their price-capped tariff for a fixed deal. For our full analysis, see Martin's latest 'should you fix your energy deal?'

  • How has the price cap changed over time?

    The energy price cap has changes every six months (though this is set to change from October) – mainly based on average energy wholesale prices in the months leading up to each change (see how is the price cap calculated? for more info). As a result, the average price of the cap, based on typical use, has fluctuated since it was first introduced in 2019.

    As the table below shows, the price cap saw its steepest increase to its highest ever level in April.

    How energy price cap has changed

      Monthly direct debit  Prepayment (1)  Other payment method
    2022 summer £1,971/year £2,017/year £2,101/year
    2021/2022 winter  £1,277/year £1,309/year £1,370/year
    2021 summer £1,138/year £1,156/year £1,223/year
    2020/2021 winter £1,042/year £1,070/year £1,121/year
    2020 summer £1,126/year £1,164/year £1,209/year
    2019/2020 winter £1,143/year £1,182/year £1,227/year
    2019 summer £1,217/year £1,256/year £1,305/year
    2018/2019 £1,104/year £1,143/year £1,186/year

    Based on Ofgem figures for typical dual-fuel use. Winter price caps last from 1 October to 31 March, summer price caps last from 1 April to 31 September. (1) The prepayment price cap has been in place since 2017, we've only shown 2019 onwards for comparison against other payment methods.

  • How do I know if I'm on a price-capped tariff?

    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 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).

  • Does the price cap change depending on how I pay?

    Yes. The price cap is set differently for those that pay by monthly direct debit, those that pay quarterly or on the receipt of a bill, and for those that prepay for their energy:

    • If you pay by direct debit, from 1 April 2022 the price cap is an average £1,971/year on typical use. This is the lowest, as direct debit is cheaper for suppliers.

    • If you pay by cash, cheque or quarterly direct debit, the price cap is £2,101/year on typical use. Ofgem says this is higher to reflect the additional costs from suppliers to bill those that don't pay by monthly direct debit.

    • If you prepay for your energy, the price cap is £2,017/year. Similarly, Ofgem says it costs more to bill customers with prepayment meters, compared to those paying by direct debit.
  • How is the price cap calculated?

    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 55% of a typical bill for a tariff priced at the maximum allowed under the current price cap from 1 April 2022.

    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, Ofgem has added the costs resulting from all of the suppliers that have failed in recent months to the price cap from April. About £68 of the typical £1,971/year bill under the new price cap is for supplier failures.

    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 19% 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 10% 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 8% 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 6%.

    • 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.
  • How long will energy prices be capped for?

    When it was first introduced, the cap was set to remain in place until at least the end of 2020, although the Government has the option to extend it on an annual basis until 2023 at the latest.

    The Government has since announced its intention to allow the price cap to be extended beyond 2023 if required.

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