Explaining the Energy Cap:

On 25 May Ofgem announced the price cap for the period of 1 July to 30 September. The last year has seen unprecedented turbulence in the energy landscape in terms of both retail prices, and government intervention to reduce the effects of the cost-of-living crisis on energy customers. This means it’s more complex to understand what the price cap means for people than in previous years and requires some careful unpicking. Let’s look at the headline figures.

A household with typical consumption on a dual electricity and gas bill will pay:

  • £2,074 a year if they pay by direct debit;
  • £2,211 a year if they pay by standard credit (on receipt of bill);
  • £2,077 a year if they have a prepayment meter.

Prices are worked out per unit of energy used. If consumers use more they will pay more. The exact unit rate and standing charge under the price cap — suppliers’ standard variable tariffs — will depend on the region where the customer lives.

Prepayment meter households will continue to benefit from a unit rate discount under the Energy Price Guarantee. The discount will apply to gas unit rates only. You can find more information on Energy Price Guarantee — GOV.UK and the regional unit rate discounts for gas prepayment customers on Energy Price Guarantee (prepayment meters): regional rates, July to September 2023 — GOV.UK.

Because of the various support schemes that were in operation over the winter months and coming into the spring period, it’s not possible to make simple statements about whether consumers will be better off as the new price cap takes effect. Let’s look at why this is in a bit more detail.

The Energy Price Guarantee is a limit on gas and electricity prices for most households. It is in place as a safety net between 1 October 2022 and 31 March 2024. The support under the Energy Price Guarantee between 1 October 2022 and 30 June 2023 meant that an average consumer’s bill was £2,500. It was due to go up to an average of £3,000 on 1 July but from 1 July it’s the price cap that sets unit rates for consumers without a prepayment meter. This is because the price cap is below the threshold of the Energy Price Guarantee — therefore consumers without a prepayment meter do not get a discount from the Energy Price Guarantee.

But households also got £400 under the Energy Bill Support Scheme. This was made over 6 payments between October 2022 and March 2023. Because this additional support has ended, it’s not possible to say that everyone will feel their bills have reduced. Bills will also depend on people’s individual usage. Some people might feel that they are paying more.

It’s also important to note that the price cap only affects consumers on default, variable or prepayment tariffs — it doesn’t apply to fixed tariffs. You can find out what type of tariff you are on by looking at your bill or contacting your supplier.

You can read more about the energy price cap on the Ofgem website.

What typical consumption means:

The typical domestic consumption values (TDCVs) are industry standard values for the annual gas and electricity usage of a typical domestic consumer. The TDCVs used to calculate the price cap are 12000 kWh for gas, 2900 kWh for electricity and 4200 kWh for Economy 7. Consumers can find details of their annual consumption on their annual statement. You can read more about average gas and electricity use on the Ofgem website.

How the price cap works:

The price cap is based on the costs that Ofgem calculates suppliers need to spend to provide energy to a consumer’s home, including wholesale, network and policy costs. If those costs rise then that is reflected in the cap being increased in the next price cap period. Ofgem used to review the price cap every 6 months which meant new rates took effect on 1 October and 1 April. They now review the price cap every 3 months.

Switching advice:

Fixed tariff customers

Consumers should consider whether it would be worth switching to a standard variable tariff, bearing in mind:

  • their unit rates compared to those under the price cap
  • any applicable exit fees
  • how much time is left on the contract

Consumers will be able to change tariffs, or move to a new supplier 49 days before the end of their fixed term. If their contract has an exit fee, they will not need to pay this.

Consumers may want to consider another fixed term contract — in which case they should follow the same advice as any customer wanting to switch or fix.

Customers wanting to switch or fix:

In the past, fixed-term tariffs have worked out as a better deal for consumers. As energy wholesale prices have decreased, we might start to see more fixed tariffs available. Fixed tariffs will help consumers have control over their energy bills. They can be confident that their unit rate and standing charge won’t increase for the duration of their fixed term. However, there is always a risk in fixing an energy tariff and consumers may not benefit over the term of their contract. Equally, if energy wholesale prices increase, the price cap will increase and consumers may have been better off on a fixed tariff. Ultimately, fixing will be a decision that the consumer will need to make based on this information and the tariffs available.

Consumers wanting to compare energy rates should use an Ofgem Confidence Code approved provider to compare prices. They should also ask their supplier if they’re offering any existing customer only rates as these won’t appear on price comparison sites.

Consumers worried about paying their bill:

Anyone worried about paying their bill should contact their supplier in the first instance. They are obliged to discuss payment plans and direct consumers to government and third sector support where available.

Consumers can also check with their supplier if they are being billed for the wrong meter reading, or if they think there is a meter fault.

Future price cap announcements:

On 25 August Ofgem will announce the price cap for the period 1 October to 31 December 2023. We’ll review the information and then update this article to explain how it’ll affect energy customers.


Tom Togher

July 14, 2023.