The government's energy price freeze has ended with Ofgem's energy price cap now dictating energy prices once again. So what does this mean for our energy bills?
The energy price cap has now been set at £1,928 as of 1 January 2024 meaning energy costs are rising again(Image credit: Getty Images)
The energy price cap, which limits the amount energy companies can charge households for their energy bills, has risen to £1,928 as of 1 January 2024.
The announcement comes as part of Ofgem's quarterly update to the energy price cap. The rise could leave millions searching for energy saving tips to try to lower their bills.
Here’s what you need to know, including what the energy price cap is, who it affects, and what Ofgem’s future updates will mean for our energy bills.
Energy price cap explained
The energy price cap was originally introduced by the government in 2019 to limit how much firms can charge consumers for their energy, and ensure households on default tariffs pay fair gas and electricity prices.
However, energy price rises in Europe has put a spanner in the works and Ofgem has needed to increase the energy price cap to stop energy companies going bust.
The scheme was replaced last year by the introduction of the Energy Price Guarantee which capped bills at £2,500, but due to lowering energy bills this is now redundant and the price cap will now be used to cap energy bills once again.
What is the energy price cap?
The current energy price cap was set on January 1 to £1,928, representing a 5% increase from the previous quarters £1,834.
Jonathan Brearley, CEO of Ofgem, said this rise was due to "the wholesale cost of gas and electricity rising, which needs to be reflected in the price that we all pay".
Who does the energy price cap affect?
The energy price cap affects the energy bills of around 23 million households in England, Wales and Scotland. Variable energy tariffs are governed by the energy price cap, whether you pay by direct debit, standard credit or a prepayment meter.
It does not apply if you are on a fixed-term energy tariff, according to Ofgem, or a standard variable green energy tariff as this is exempt.
Does the energy price cap cap my energy bills?
In short, no. The energy price cap is not designed to limit consumer energy bills, but rather a cap on how much suppliers can charge per kWh of energy use, plus a maximum daily standing charge. As such, households are still charged for how much electricity and gas they use — this is not capped.
That said, the rates charged per KWh and standing charges are only capped to a degree as it does still vary per region. This is due to the difference in network charges across the UK, plus it reflects how much it costs to transport energy to where you live.
The current maximum rate for electricity is £0.30 per kWh and for gas, it is £0.08 per kWh. When standing charges are added – capped at £0.53 a day for electricity and £0.29 for gas. Although, these rates do vary by region.
When is the energy price cap set?
Prior to August 2022, the energy price cap was updated every six months, but surging energy price rises led Ofgem to announce that it would be updated quarterly, which it said would help to bring stability to the energy market and reduce price shocks for consumers.
It is now adjusted in January, April, July, and October each year.
The energy price cap is reviewed on a quarterly basis to protect energy firms from going bust(Image credit: Getty Images)
How does Ofgem calculate the energy price cap?
The wholesale market price of gas and electricity plays the biggest role in how the price cap is calculated. Ofgem uses these figures to assess how much it costs energy suppliers to buy energy from the market, and how much consumers can pay.
The price cap is then updated to reflect how much it would cost energy suppliers to provide energy for an average home.
Why is the energy price cap so high?
The very first energy price cap level was set at £1,137 in January 2019, with the prepayment cap set at £1,138. In October 2021, the typical bill was very similar at £1,277 a year.
But energy prices started to rise in 2021 through a combination of factors including long winters in Asia and Europe and the reopening of economies following the Covid-19 pandemic, where high levels of gas stocks were used.
Russia’s invasion in Ukraine in 2022 played a significant role in the increase in wholesale gas markets. Russia is a major gas supplier to international markets, and even though the UK receives under 5% of its gas from Russia, the instability caused by the invasion – and the subsequent economic sanctions on Russia – has resulted in Europe buying less gas from Russia, which has pushed up wholesale prices.
In February, prior to the conflict beginning, the wholesale gas price was £1.97 per therm, which rose by 180% to £5.56 per therm in mid-August.
The wholesale price is the price that all energy suppliers must pay, and if one energy source increases this cost – as has been the case with gas – then this pushes up the price of electricity too.
Electricity costs were around £1.88/Mwh in February 2022 and rose to £618/Mwh in August 2022, an increase of 235%.
Around 40 energy suppliers have ceased trading since the beginning of 2021 due to rising costs.
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News Editor Joseph has previously written for Today’s Media and Chambers & Partners, focusing on news for conveyancers and industry professionals. Joseph has just started his own self build project, building his own home on his family’s farm with planning permission for a timber frame, three-bedroom house in a one-acre field. The foundation work has already begun and he hopes to have the home built in the next year. Prior to this he renovated his family's home as well as doing several DIY projects, including installing a shower, building sheds, and livestock fences and shelters for the farm’s animals. Outside of homebuilding, Joseph loves rugby and has written for Rugby World, the world’s largest rugby magazine.
