What is the energy price cap and how high will it go next?

Ofgem has confirmed that energy bills for a typical household will rise in October from £1,971 to £3,549 a year, with further increases predicted next year.

Millions of Britons will see their energy bills rocket when the price of electricity rises from 28p per kWh to 52p on average between October and December, with gas increasing from 7p to 15p per kWh.

The record 80% October increase in the price cap, announced by the regulator Ofgem on Friday morning, means a typical default tariff customer will pay an extra £1,578. However, some forecasts have suggested bills could rise to £6,823 next year, said The Times.

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Ofgem said predictions of future price cap levels should be treated with “extreme caution”, but no one is forecasting a return to previous prices anytime soon. “While the price cap is expected to fall later in 2023, it will remain very high,” said Sky News.

What is the energy price cap?

Every few months, the energy regulator Ofgem reviews the maximum price that suppliers in England, Wales and Scotland can charge domestic customers on a standard – or default – tariff. This is otherwise referred to as the “energy price cap”.

Introduced in 2019, the cap was “designed to eliminate the ‘loyalty penalty’ that many millions of customers were paying by not shopping around for cheaper deals”, said the Financial Times.

The cap sets the maximum price that energy companies can charge per kWh of gas and electricity, known as the unit rate, as well as the cost of getting power into your home, known as the standing charge. It serves as a cap on only the most expensive tariffs, and was designed to protect “those who are unaware of or are unsure of how to switch to a new deal or provider in order to save money”, the i news site said.

Millions of households opted for default standard variable tariffs that are covered by the cap when their previous fixed-price deals ended, “because there are no longer any cheaper fixed deals on offer”, The Times said in January. Standard variable tariffs were capped at £1,971 a year from 1 April.

Calling it a “price cap” is a “misnomer”, said Martin Lewis, founder of MoneySavingExpert.com. “There’s no max you pay for energy, think of it more as a cap on the cost of each unit of gas and electricity.”

How is the price cap reviewed?

Ofgem sets the price cap based on a “broad estimate” of how much it costs a supplier to provide gas and electricity services to a customer, The Telegraph explained.

The calculation is made up of “wholesale energy costs, network costs such as maintaining pipes and wires, policy costs including government social and environmental schemes”, the paper added. “Operating costs, such as billing and metering services, and VAT” are also thrown into the mix.

It also applies to customers on a standard variable tariff, meaning that if consumers have never switched energy firms, or switched more than a year ago, they have most likely defaulted to the energy company’s standard tariff.

The cap was previously reviewed every six months, but Ofgem “introduced an overhaul” in early August, said Which?. This means it is now reviewed every three months instead. The energy regulator said “the shake-up is designed to allow customers to get falling prices more quickly” than the six-month review system. “However, that also applies to price rises.”

What was the price cap review in 2021?

Last year, the energy price cap increased twice, rising to £1,138 from 1 April, followed by a 12% increase on 1 October to £1,277. The second increase saw it reach its “highest point ever”, i news said at the time.

The increase was mostly due to rising wholesale energy prices, so Ofgem allowed energy companies to charge higher prices. Ofgem indicated it could review how the energy price cap works in light of the wholesale gas crisis, which could result in a reform of “how it is calculated and how frequently it can be adjusted”, The Telegraph reported.