What is the Ofgem energy price cap? Households face...

The average UK household's energy bills will increase by 6.4 per cent in April after the energy regulator announced the third consecutive hike in the cap on gas and electricity costs. Many households will see their energy bills rise by £111 to £1,849 annually. This increase applies to the three months to July when the cap will be reviewed again.

Ofgem reviews the cap every few months, limiting the tariffs energy providers can charge households on default or standard variable contracts. The most recent adjustment was in January, when Ofgem raised the cap by 1.2 per cent, increasing it to the equivalent of £1,738 a year for those paying by direct debit. This rise followed a spell of frigid temperatures across Europe, depleting gas reserves and driving market prices higher.

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Ofgem says 11 million customers are on fixed contracts and will not be affected by the price cap adjustment. Jonathan Brearley, CEO of Ofgem, acknowledged the impact of the rise, stating: “We know that no price increase is ever welcome and that the cost of energy remains a significant challenge for many households.

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“But our reliance on international gas markets results in volatile wholesale prices, which continue to drive up bills. That’s why it is more important than ever to accelerate investment in a cleaner, homegrown [energy] system.”. Here’s everything you need to know about who sets the energy price cap and how it works.

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Ofgem is the independent regulator of the British energy market, responsible for protecting consumers. A key part of its role is setting a price cap — a limit on what energy firms can charge customers on default or standard variable tariffs. The Government introduced the energy price cap, which Ofgem oversees, in January 2019. Although originally intended as a temporary measure, it has remained in place.

The cap is a regulatory mechanism to prevent energy suppliers from overcharging customers on default or standard variable tariffs. It aims to protect consumers, particularly those who do not regularly switch suppliers to secure better deals. The cap applies if you are on a default energy tariff, whether you pay via direct debit, standard credit, or a prepayment meter. However, it does not apply to fixed-term tariffs.

Historically, variable tariffs were more expensive than fixed-rate deals, and many customers remained on them because they failed to switch suppliers when their fixed-term contract ended or their supplier ceased trading. However, fixed-term tariffs are often more expensive than the price cap, affecting most customers..

In August 2022, Ofgem said: "The global rises we’re seeing in gas prices mean this is a very challenging time. Right now, this may mean you find few better-value tariffs than being on a supplier’s default rate covered by the Government’s energy price cap, if you are already on one.".

The cap limits the maximum amount energy suppliers can charge per unit of gas or electricity for customers on default tariffs. However, it does not cap total bills — the more energy you use, the more you pay. It also includes a maximum daily standing charge, which covers the fixed cost of supplying energy to your home.

The cap is reviewed regularly and is based on wholesale energy prices, network costs, operating expenses, policy costs, VAT, and supplier margins. The specific amount varies depending on your payment method, such as direct debit, pay-on-receipt, or prepayment.

The EPG, which capped the typical annual household energy bill at £2,500, ended on March 31, 2024. Since then, prices have been determined by Ofgem’s energy price cap, which was reintroduced on July 1, 2023. The cap limits the amount suppliers can charge per energy unit (measured in pence per kilowatt-hour, or p/kWh). It sets a maximum daily standing charge — the fixed cost of being connected to the energy network.

As mentioned, the average household bill will increase from April 1, following a 1.2 per cent price rise in January. For electricity, the price cap will rise from 25p to 27p per kWh, with the daily standing charge decreasing from 61p to 54p. Gas prices will increase from 6.34p to 6.99p per kWh, while the standing charge will rise slightly from 31.65p to 32.67p.