What is the energy price cap and how does it work?

HOUSEHOLDS are set to see energy bills rise under a new price cap in April – we explain what it is and how it works.

Chancellor Jeremy Hunt is expected to set a new price cap in today’s Budget, which will come into force next spring.

The price cap will replace the current Energy Price Guarantee, which means the typical household will pay £2,500 a year for their bills.

Here’s how the changes will affect you.

What is the energy price cap? 

The price cap on energy bills was introduced in January 2019 as a way to ensure that households are not ripped off by their energy suppliers.

Twice a year, energy regulator Ofgem would set the maximum price that households on their supplier’s default tariff would have to pay for every unit of gas and electricity they used for the next six months.

Ofgem announced a major shake-up in August, stating that the price cap would change every three months.

It affects roughly 22million people on default or standard tariffs offered by the country’s energy providers, according to Ofgem estimations.

The cap is calculated based on the wholesale price of gas and electricity and also includes allowances for tax, charges paid to the energy networks, green levies and social payments.

The wholesale price of gas has soared by around eightfold in the last year.

That rise has been passed onto customers – the price cap was already at a record £1,971 over the summer.

Gas prices were already increasing last summer as demand bounced as countries emerged from lockdown.

But the situation was made much worse when Russia invaded Ukraine and started to restrict gas exports to Europe.

Gas prices are also decisive for electricity prices.

This is because gas is so important for the generation of electricity.

Over the last year, 42% of the UK’s electricity came from burning gas.

How much is the energy price cap?

The cap on standard variable and default tariffs is set by Ofgem.

The previous energy price cap meant that the average annual household bill was £1,971 a year.

It was supposed to hike to £3,549 a year in October.

To stop bills from spiralling, the then-PM, Liz Truss, replaced the cap with the Energy Price Guarantee, which rolled out from October 1.

It froze bills at £2,500 a year.

It was suppose to be in place for two years, but after the fallout of the mini-Budget and concerns over rising government debt, Chancellor Jeremy Hunt said the guarantee will only last until April.

The £2,500 figure is an average bill a household might pay.

You could pay more if you use more energy – or less than this if you use less energy.

Right now, the current rates for duel fuel tariffs include 7p per killowatt hour (p/kWh) for gas and 28p/kWh for electricity.

Energy giant Octopus is working on a £40 million plan to tackle standing charges when the price cap hits – which are at 27p per day for gas and 45p per day for electricity right now.

Under the new promise, duel fuel customers will be paying 44.71p per day for electricity and 26.84p per day for gas from October 1 instead – which saves them roughly £12 per year.

Will the price cap replace the energy price guarantee in April?

Jeremy Hunt is expected to re-introduce the energy price cap in April, when the energy price guarantee ends.

It is expected that a new energy cap of around £3,000 will kick in.

There will also be no repeat of the £400 one-off payment made to households this year to keep bills down.

It means millions of households are set to be £900 a year worse off.

How does the energy price cap work?

The energy price cap works by setting a limit on the maximum amount suppliers can charge for each unit of gas and electricity.

Ofgem sets a maximum daily standing charge which is what households have to pay in order to have their home connected to the National Grid.

The energy price cap only applies to providers’ standard and default tariffs.

This means if you’re on a fixed-term energy deal, the cap doesn’t apply to you.

Over six million households are currently on a fixed energy tariff, and could end up paying more than the Energy Price Guarantee cap due to the way the discount would be applied.

So far, British Gas, EDF, Octopus Energy and Ovo Energy have confirmed that none of their customers on fixed tariffs will be hit by this loophole.

The new rules mean that customers on expensive fixed deals can simply move on to the cheaper standard variable tariff, which is protected by the Energy Price Guarantee, free of charge.

So you should keep an eye out on emails and text messages if you haven’t received an update from your supplier yet.

Is it cheaper to switch or stick with the default tariff?

There are usually no prizes for loyalty when it comes to energy bills.

In the past, households could save hundreds of pounds by switching supplier every year.

This is harder to achieve in today’s market – Martin Lewis has previously said it might be worth some customers fixing a deal.

As energy bills froze at £2,500, there’s no need to look into fixing a deal now.

What help can I get with my energy bills?

Energy suppliers may offer you a grant if you’re in debt to your provider and struggling to pay your bill.

For example, British Gas has earmarked £6billion to help customers.

Bulb has re-opened its hardship fund and some households could get up to £140.

Some customers may be eligible for extra help such as payment breaks and emergency credit to top up prepayments. 

Millions have already received part of their £400 energy rebate from the government from October – be on look out for scams regarding this as several emails asking for personal details are being spotted.

It’s important to note the £400 payment will land in bank accounts automatically and you should not give away personal details to anyone.

Households might be eligible for the Winter Fuel Payment, which gives people over 65 up to £300 to help keep their home warm during the colder months.

Here is everything you need to know about the gas price crisis and the latest on Russia/Ukraine crisis.