What is the energy price cap?
The ‘default tariff cap’ – widely called the energy price cap – determines the maximum price per unit customers can pay for gas and electricity per year. It applies to customers on ‘variable’ or ‘default’ tariffs – where rates fluctuate in response to market forces and was originally introduced in 2019 to protect consumers who did not change to cheaper offers or were unable to switch.
The cap is usually updated every six months (though recently it has been every three months due to rapid cost increases), based on the UK energy regulator Ofgem’s estimates of the costs faced by energy suppliers, and allows for some supplier profit. The cap only limits the price charged per unit of energy, not the overall bill a customer pays, which depends on overall use.
Ofgem expresses the cap in terms of the annual cost for a household with typical energy usage. The cap remained stable for a long time before rising sharply from £1,277 per year in October 2021 to £4,279 per year in January 2023 before falling to £3,280 per year in April 2023, due to a drop in global energy costs. Ofgem has now reduced the cap for typical energy use to £2,074 per year for July to September. And the cap has now fallen to £1,923 per year for October to December.
When the Ofgem price cap rose significantly in October 2022, the government announced two packages to help households pay for rising energy bills: the Energy Price Guarantee (EPG) and the Energy Bills Support Scheme (EBSS).
The EPG capped the amount that households had to pay per unit of gas or electricity from October 2022 to June 2023. The EPG effectively limited the average household bill to around £2,500.
The EBSS was a £400 rebate given to all UK households to help with their energy bills over the winter (October 2022-March 2023).
The EPG ended on 1 July 2023. However, now that Ofgem’s price cap has fallen below £2,500 per year, the government’s EPG would be redundant.
The EBSS ended as planned but was replaced with more targeted support for certain groups, including: £900 to households on means-tested benefits; £300 for pensioners; and £150 to those receiving non-means tested disability benefits. These will still be handed out as planned.
There were several reasons for the dramatic price increases last year. First, wholesale energy prices increased significantly from mid-2021 (meaning energy suppliers had to pay more to buy gas and electricity). This was due to growing global demand post-lockdown and other supply issues relating to gas in particular. Russia’s invasion of Ukraine then inflated prices much further as Russia cut gas supplies to European countries, who are themselves trying to reduce their reliance on Russian gas.
Energy prices are dropping due to falling wholesale energy costs. This is a result of European countries successfully sourcing alternative supplies of gas from around the world and also increasing their gas storage.