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The UK is in the grip of the energy crisis. On an almost daily basis, news outlets are speculating on the changes to the energy price cap due in October 2022.
The energy price cap used to be just another obscure Ofgem regulation, but the threat of further price rises is causing anxiety for people across the country.
This guide explores everything you need to know about the energy price cap.
What is the energy price cap?
The energy price cap limits how much suppliers can charge for electricity and gas under standard variable tariffs.
In 2022 the conflict in Ukraine has caused the real cost of energy to soar. The knock-on impact is that the cheapest tariffs available in the market are the standard variable tariff protected by the price cap.
Below we show how the price cap translates into a daily standing charge and cost per kWh of electricity and gas. However, here’s a graph showing what this means for the annual energy costs of the average household
We’ve also forecasted changes to the price cap based on Ofgem’s methodology and the current forward rates in the wholesale energy market.
Unfortunately, industry analysts expect significant increases in the price cap over the next year.
Why is the energy price cap rising?
The energy price cap is rising to reflect the actual cost of supplying electricity and gas to homes.
Here’s our brief outline of the events that have caused the price of energy to skyrocket in Britain:
- Since the early 1990s, the natural gas output of the North Sea has declined, making Britain dependent on importing gas from Europe.
- In 2017 the UK government decided to remove most of Britain’s gas storage capacity.
- On 24 February 2022, Russia invaded Ukraine.
- In support of Ukraine, The UK, Europe, and the US implemented a series of economic sanctions against Russia.
- Responding to the economic sanctions, Russia has gradually reduced the volumes of gas it sells to Europe.
- In the absence of Russian Gas and a lack of alternative supplies, the price of natural gas has soared.
- The UK continues to generate approximately 40% of its electricity by burning natural gas, causing the price of electricity also to skyrocket.
What is the current energy price cap?
The price cap is often quoted in newspapers as a total charge per year for a household. Headlines of a specific annual cost are a bit misleading.
The price cap is per kWh of energy consumed and depends on how you pay for bills and which region of the country you live in.
The tables below show the current price cap based upon region and payment type, including the standard VAT at 5%.
Gas price cap – April 2022 to September 2022 – Standing charge per day, including VAT
| Payment type | Standard Credit | Prepayment | Direct debit |
|---|---|---|---|
| Daily standing charge (p/day) | £0.3203 | £0.3728 | £0.2722 |
Gas price cap – April 2022 to September 2022 – Charge per kWh including VAT
| Payment method x Region | Standard Credit | Prepayment | Direct debit |
|---|---|---|---|
| North West | £0.0773 | £0.0732 | £0.0734 |
| Northern | £0.0761 | £0.0726 | £0.0723 |
| Yorkshire | £0.0767 | £0.0729 | £0.0728 |
| Northern Scotland | £0.0773 | £0.0734 | £0.0734 |
| Southern | £0.0788 | £0.0746 | £0.0748 |
| Southern Scotland | £0.0773 | £0.0734 | £0.0734 |
| N Wales and Mersey | £0.0776 | £0.0733 | £0.0737 |
| London | £0.0792 | £0.0749 | £0.0752 |
| South East | £0.0771 | £0.0731 | £0.0732 |
| Eastern | £0.0774 | £0.0737 | £0.0734 |
| East Midlands | £0.0767 | £0.0728 | £0.0728 |
| Midlands | £0.0776 | £0.0735 | £0.0737 |
| Southern Western | £0.0788 | £0.0749 | £0.0748 |
| South Wales | £0.0784 | £0.0738 | £0.0744 |
Elec price cap – April 2022 to September 2022 – Standing charge per day, including VAT
| Payment method x Region | Standard Credit | Prepayment | Direct debit |
|---|---|---|---|
| North West | £0.4789 | £0.4719 | £0.4224 |
| Northern | £0.5493 | £0.5383 | £0.4891 |
| Yorkshire | £0.5452 | £0.5344 | £0.4853 |
| Northern Scotland | £0.5612 | £0.5496 | £0.5005 |
| Southern | £0.4911 | £0.4833 | £0.4340 |
| Southern Scotland | £0.5570 | £0.5456 | £0.4965 |
| N Wales and Mersey | £0.5352 | £0.5250 | £0.4758 |
| London | £0.3724 | £0.3714 | £0.3214 |
| South East | £0.4728 | £0.4661 | £0.4166 |
| Eastern | £0.4333 | £0.4289 | £0.3792 |
| East Midlands | £0.5054 | £0.4968 | £0.4475 |
| Midlands | £0.5410 | £0.5305 | £0.4813 |
| Southern Western | £0.5778 | £0.5652 | £0.5163 |
| South Wales | £0.5412 | £0.5307 | £0.4815 |
Gas price cap – April 2022 to September 2022 – Charge per kWh including VAT
| Payment method x Region | Standard Credit | Prepayment | Direct debit |
|---|---|---|---|
| North West | £0.2951 | £0.2779 | £0.2802 |
| Northern | £0.2853 | £0.2686 | £0.2709 |
| Yorkshire | £0.2882 | £0.2713 | £0.2736 |
| Northern Scotland | £0.2939 | £0.2767 | £0.2791 |
| Southern | £0.2997 | £0.2822 | £0.2846 |
| Southern Scotland | £0.2932 | £0.2760 | £0.2784 |
| N Wales and Mersey | £0.3116 | £0.2934 | £0.2958 |
| London | £0.3121 | £0.2939 | £0.2963 |
| South East | £0.3106 | £0.2924 | £0.2948 |
| Eastern | £0.3080 | £0.2900 | £0.2924 |
| East Midlands | £0.2910 | £0.2740 | £0.2763 |
| Midlands | £0.2935 | £0.2763 | £0.2787 |
| Southern Western | £0.2992 | £0.2817 | £0.2841 |
| South Wales | £0.2980 | £0.2805 | £0.2829 |
History of the consumer price cap
Teresa May’s Conservative Government enacted the consumer price cap in early 2018. The Domestic Gas and Electric (Tariff Cap) bill was adopted by parliament, requiring that Ofgem imposes a maximum price on poor value energy tariffs.
The government’s analysis found that approximately 11 million households across Britain were paying over £300 more each year compared to the cheapest tariffs available.
The overcharging of consumers occurs when customers stay with the same energy supplier for many years and are paying the uncompetitive standard variable energy tariff. The bill imposes a maximum price that can be charged under the standard variable tariff.
The bill was expected to reduce overcharging by energy suppliers by £1.4 billion each year.
How is the energy price cap calculated?
The price cap tariff bill requires that Ofgem apply the cap at a rate that will continue to enable suppliers to compete effectively and encourage customers to compare energy suppliers and switch to the most competitive tariffs.
The energy price cap is calculated to be the underlying cost to supply electricity or gas plus an allowance for the profit of the energy suppliers.
Here’s a breakdown of the separate costs incurred by energy suppliers included within the price cap:
- Wholesale energy – The price the supplier pays for the electricity and gas based upon forward rates available on the market. Check out our guide to the latest wholesale energy prices.
- Network costs – The cost of moving energy through the national grid, local electricity distribution network and local gas distribution networks to deliver to individual household customers.
- Policy costs – The cost of the government’s social and environmental policies, including the emissions trading scheme.
- Operating costs – The cost of being an energy supplier, including providing energy meters, a customer services department and producing energy bills.
- Payment collection costs – The cost of collecting money from customers. The allowance is slightly different depending on whether you pay by direct debit, BACS or prepayment.
- VAT – An additional 5% consumer tax levied on all household bills.
Exemptions from the energy price cap
Prepayment meter price cap
Prior to the introduction of the energy price cap, Ofgem introduced a Prepayment Meter Price Cap in 2017. The prepayment price cap applies to the poorest households with the lowest credit ratings that need to pay energy upfront by topping up their meter.
The prepayment price cap works similarly to the energy price cap by Ofgem but applies a slightly different rate per kWh.
Renewable energy tariffs
Renewable energy tariffs are exempt from the energy price cap. Ofgem recognises that renewable energy tariffs that use entirely renewable energy generation inevitably incur more costs than fossil fuel-based energy supply. Ofgem grants the green exemption on a supplier-by-supplier basis and only when they are satisfied that the tariff encourages renewable energy production.
The effect of the price cap on comparing energy suppliers
Since the winter of 2022, the market for comparing energy suppliers has frozen. If you visit an energy comparison site, you’ll be greeted with a message that recommends that you do not switch energy suppliers.
So what is going on?
The typical situation in the energy market is that suppliers’ fixed rate deals are cheaper than the default standard variable tariff. This means people can save hundreds of pounds by comparing and switching to the most competitive fixed tariffs in the market.
Currently, however, the energy costs paid by suppliers have risen above the price cap. This means that suppliers’ fixed-rate energy tariffs are more expensive than the default, standard variable tariffs protected by the price cap.
Currently, the best option for people is to stay put on their current tariff and not switch.
How often is the energy price cap updated?
On the 4th of August 2022, Ofgem announced that the energy price cap would be updated quarterly rather than bi-annually.
The decision to change the energy price cap more regularly was made to reflect increased volatility in energy prices. The energy price cap needs to reflect the actual costs incurred by suppliers, or it will cause more energy supplier bankruptcies.
The quarterly updates occur on 1 April, 1 July, 1 October and 1 January, with the pricing methodology announced approximately a month in advance. The quarterly updates are designed so that customers are paying the real cost of energy.
What will happen to the energy price cap in October 2022?
On 1 October 2022, Ofgem will update the energy price cap to adjust for the rising cost of energy.
Ofgem hasn’t yet announced precisely how much the price cap will be, but there has been an enormous amount of speculation in the media.
The most recent predictions among industry analysts is an average dual fuel annual bill of c.£3,500, approximately an 80% rise on current levels.
The final announcement from Ofgem on the price cap coming in on 1 October 2022 is expected in late August.
Who is protected by the energy price cap
As of July 2022, 24 million households are paying standard variable tariffs protected by the price cap.
Since you can’t save money by switching energy suppliers, more households are coming to the end of their fixed rate tariff and rolling onto the default standard variable tariffs protected by the energy price cap.
This situation means that the price cap effectively determines the price most households are paying for energy. In the current times of high inflation, this makes the energy price cap announcement very important for the finances of houses.
Criticisms of the energy price cap
The price cap legislation was designed to stop suppliers from charging too much on those households on a standard variable tariff.
Today the energy price cap is not serving this function; instead, it is artificially holding energy bills below the real cost of energy. It’s also removing the incentive for households to compare and switch energy suppliers meaning that the deregulated energy market is not functioning as it was designed.
Government support packages
The actual price of delivering electricity and gas to homes has approximately tripled between 2020 and now. Here’s our in-depth analysis explaining why this happened:
Why is electricity so expensive?
Why is gas so expensive?
In Britain, the current price cap is artificially protecting households from these sky-rocketing prices. In October 2022, the energy price cap will increase significantly to reflect the reality of the situation.
We’ve produced a helpful guide to the support available to households struggling to pay energy bills.
Does the price cap apply to businesses?
The energy price cap only applies to the household market for energy.
Businesses are not protected by the energy price cap, meaning that the prices paid under commercial deemed contracts are much higher than those for households.
In these times of rising energy prices, it’s therefore essential that businesses are shopping around for the best available deals.
Let AquaSwitch help you compare the market today with our:
Business energy comparison service
Business gas comparison service
Business electricity comparison service
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