The Ofgem energy price cap explained: what it is and how it affects your bills
20 October 2021 | Aimee Tweedale
Unfortunately, the wholesale price of energy has been rising rapidly in 2021. This has made the energy market headline news – and the energy price cap has been mentioned a lot lately, too. We’ve had many questions from our members, who want to know what the cap covers. That’s why we’ve put together this guide to the Ofgem energy price cap, to explain what it means for you and your bills.
We’ve also put together these FAQs to reassure you that your energy supply is safe and sound. They should answer any questions you might have about what else is going on in the UK energy market, at the moment.
So: what is the energy price cap? And how does it work? Here’s a breakdown of everything you need to know about how the energy regulator, Ofgem, sets energy prices – for both customers and energy companies.
What is the energy price cap?
The energy price cap is a cap on the price of gas and electricity in the UK. Sometimes, it gets called the “Ofgem price cap”. The price cap has gone up recently, but it can go down too. It all depends on how much energy is costing wholesale.
The cap applies to all standard variable tariffs in the UK – these are the tariffs where your prices can go up and down. But it doesn’t apply to fixed rate tariffs – these are the tariffs where your prices are fixed until the end of your contract.
The price cap is reviewed twice a year by Ofgem. Changes to the price cap are usually announced in February, coming into effect in April. Then this happens again in August, with changes coming into effect in October.
The price cap sets the rate you can be charged for your energy per kWh, if you’re on a variable plan. That’s known as the unit rate. It also sets the standing charge – this is the amount you pay per day to stay connected to the grid (covering the costs for things like power lines and pipes).
It’s important to remember that if you use more energy then this will cause your bills to go up, too – for example, when the heating is turned up high over winter. That’s the other main factor affecting your costs. Using more energy will cause your bills to rise whatever type of tariff you’re on, whether it’s variable or fixed-rate.
When was the energy price cap introduced?
Ofgem first introduced the energy price cap on 1 January 2019. At that point, there was already a price cap in place for prepayment meters – you can find out more about that below.
Why does the energy price cap exist?
The price cap exists because wholesale costs of energy often go up and down, for lots of reasons. “Wholesale costs” refers to how much it is for retailers like us to buy energy, so that we can power all our members’ homes.
With the price cap set twice a year, it gives some stability to customers just like you. Suppliers have to make sure that their standard variable tariff is at the cap or below it.
Is there a price cap for pay as you go meters?
Yes. The energy price cap for prepayment meters was introduced in April 2017, 2 years before the default energy price cap for those on credit meters.
What is the current energy price cap?
Since 1 October 2021, the price cap has been set at £1,277. This figure is based on the amount of energy that Ofgem believes an average household uses in the UK. You could pay more than £1,277 per year if you use more energy than the average household.
This works out at around 21p per kWh for electricity and 4p per kWh for gas1. Your supplier’s quote might vary.
The cap for prepayment meters since 1 October 2021 is £1,309.
How is the energy price cap calculated?
Ofgem works out what the energy price cap should be every 6 months by looking at the wholesale energy market. When wholesale costs go up, the energy cap goes up too. And when they go down so does the price cap. The aim is to keep prices fair for both customers and suppliers.
The calculations behind the cap are based on how much Ofgem thinks it will cost energy suppliers to buy the energy they need for their customers. Ofgem also factors in things like operating costs, which is the money suppliers spend on things like billing and installing meters, and network costs, which is the price of maintaining the pipes and wires that transport gas and electricity to your home.
To work out how much customers should be billed, Ofgem use Typical Domestic Consumption Values (TDCVs). These are statistics that Ofgem produces every 2 years, showing what the average low, medium, or high energy use per household is.
So, the latest price cap of £1,277 is based on the TDCV of a medium household. Right now, that’s 12,000 kWh of gas and 2,900 kWh of electricity. This figure is there to give you an idea of how much the average household will be paying for their energy.
How have energy price cap levels changed over time?
When the price cap was first introduced on New Year’s Day in 2019, it was set at £1,137. It rose later that year to £1,254.
After that, it fell steadily, until February 2021, when it increased again to £1,138. In October 2021, it rose by 12%. Its current level of £1,277 is the highest that it’s been, reflecting the high cost of buying energy in the wholesale market right now.
Why has the energy price cap increased in 2021?
The current energy price cap is higher because wholesale energy costs have risen rapidly in 2021. This is due to a few different factors, some of which you can read about in this government explainer. We've outlined the main ones below:
- Global economies are ramping up again after Covid-19, which is driving demand for gas
- A slowdown in wind energy has caused the UK to fall back on electricity generated by power plants, some of which burn gas
- The UK has relatively low levels of gas storage capacity, and these were also depleted during a cold spring earlier this year
How does the energy price cap affect me and my bills?
The price cap sets the maximum amount you can be charged per unit of gas or electricity you use. It also sets a maximum amount for standing charges.
Remember: this only affects you if you’re on a standard variable tariff. Customers on fixed rate tariffs aren’t affected by the energy price cap.
Other things that could affect your energy bills include:
- How much energy you use
- How well-insulated your home is
- Whereabouts in the country you live
- Whether your bill is calculated using meter readings or estimates
Does the energy price cap mean I don’t need to switch?
The energy price cap only applies to you if you’re on a standard variable tariff. It’s always important to compare prices so that you know that you’re getting the best deal on your variable tariff.
Ofgem introduced the price cap so that consumers would be protected from sudden, sharp jumps in price. But it doesn’t mean you’re protected from all price changes. On an SVT, your energy bills could go up if the price cap goes up (and vice versa).
If you’d like certainty about the price you’re paying for your energy, consider switching to a fixed rate tariff.
Save money on your energy bills with a smart meter
Looking for ways to keep your energy use down this winter? You’d be smart to consider a change of meter.
Nifty smart meters help you to track exactly how much energy you’re using, as you use it. You can even view your use in pounds and pence, to keep on top of how much you’re spending.
Keeping a close eye on your energy use won’t only help you save money, but also cut down your carbon footprint. How’s that for killing two birds with one stone?
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