How does the energy price cap work? An updated guide for 2024

There's no getting around the fact that the cost of living crisis is affecting us all. Food prices are on the up, real wages have reached record lows in many sectors and the cost of energy is skyrocketing. This crisis has arisen due to a host of complex, interconnected reasons that together have had a serious impact on global energy supply and demand.

Ultimately, it means that everyday things like putting the heating on, making a cup of tea, having a hot bath and using the oven are more expensive than ever, leading us all to keep a far closer eye on how much energy we're using day and night.

To help ease this situation, the UK government introduced something called the energy price cap. In this article, we'll break down what this all means for you in practice so you can better understand your heating bills, your rights as a consumer and how to make sure you're not paying over the odds on your gas and electricity bills.

What is Ofgem?

In order to understand the energy price cap, it's important to understand who is responsible for setting and monitoring it - Ofgem.

Ofgem, or The Office of Gas and Electricity Markets, is a non-ministerial government department that regulates the companies that operate the UK's gas and electricity networks. It essentially serves to protect the interests of gas and electricity consumers, both now and in the future, by putting various price controls and regulations in place.

To protect the interests of future and current gas and electricity consumers, Ofgem implements various price controls and regulations, such as the energy price cap. These impact the nature of billing and metering services as well as limiting the maximum wholesale price and daily standing charge per unit of gas.

To protect customers, they do the following:

• Record complaints
• Administer price caps
• Oversee social and environmental schemes
• Specify what appears on energy bills
• Provide a safety net to account for supplier failures
• Publish guides and key energy market information

What is the energy price cap?

Due to rising energy prices and the fear that many people would not be able to afford them, Ofgem introduced an energy price cap to relieve the pressure associated with paying energy bills.

The energy price cap restricts the amount energy companies can charge customers on a default energy tariff, including standard variable tariffs and those who use a prepayment meter. By capping the amount they are allowed to charge, it effectively limits the amount of profit they can make to create a fairer energy system that doesn't take advantage of the typical household by demanding that they pay above the current wholesale prices.

The cap rate set by Ofgem limits the amount energy companies can charge customers per kilowatt-hour of electricity and gas. The price cap is based on the average consumption from a 2 - 3 bedroom property using 2,900 kilowatt-hours of electricity and 12,000 kilowatt-hours of gas.

It's also worth noting that the cap is lowest for those paying by direct debit, as this is a cheaper payment method for energy suppliers.

Why was the energy price cap put in place?

To answer this, we need to look at why energy bills are rising in the first place. The rise has been caused by increases in wholesale gas prices or the amount energy suppliers pay. Wholesale energy prices have been rising since October 2021 due to various factors related to the COVID-19 pandemic and the world emerging from lockdown states.  More recently, this has been exacerbated due to conflict in Ukraine and supply chain restrictions issued on and by Russia.

Because wholesale energy costs were increasing, suppliers then looked to offset the increased costs by increasing domestic and commercial energy prices.

According to Ofgem, the rise in global gas prices is a once-in-30-years event. Many suppliers lost their businesses due to financial constraints, which only worsened the price increases. The energy market has thus had to absorb the cost of taking new customers from failing businesses.

Who does the energy price cap cover?

The government's energy price cap applies to those on a standard variable or default tariff, regardless of whether you're paying by direct debit, standard credit, or a type of prepayment energy meter.
Right now, because of the current energy crisis, the vast majority of people are on a standard variable tariff.

The price cap doesn't apply to fixed deals (these are tariffs that don't change with the rate of inflation). Although, if you're on a fixed-rate deal right now, you still get a discount on your rates under the Energy Price Guarantee.

The energy price cap also doesn't apply to any standard variable tariffs that have an exemption, households in Northern Ireland who aren't protected by Ofgem along with businesses, public services and charities.

What is the Energy Price Guarantee?

In September 2022, the price cap was replaced by a new system - the Energy Price Guarantee. This is a temporary measure that the government has introduced to provide additional financial support for UK consumers until April 2024.

Following a government announcement, the energy price cap was replaced by the new Energy Price Guarantee from 1st October 2022. This mechanism reduces the unit cost of electricity and gas so that households with typical energy use in Great Britain would pay, on average, around £2,500 a year on their energy bill until June 2023.

In May 2023, Ofgem announced that average bills would drop to £2,074 from 1st July 2023 - 30th September 2023, the first time energy bills have dropped in two years. From 1st October 2023, this figure dropped even further to an average household bill of £1,834.

On January 1st 2024, the price cap rose to £1,928 per year for the average household. This is an increase of £94 or 5% from the previous price cap. In a statement from Ofgem, the changes to the price cap are, in part, due to increases in the wholesale price of gas and oil caused by conflicts in the Middle East.

These figures are calculated based on a household with typical consumption on a dual electricity and gas bill that is paid by Direct Debit. It's important to note that the price cap doesn't necessarily limit how much you will pay, as the rate is set per unit of energy, meaning your bill will still depend on how much energy you actually use.

Can the Energy Price Guarantee help you?

Much like the original energy price cap plan, the Energy Price Guarantee can help you, but this depends primarily on your tariff type. For instance, if you're on a fixed tariff that won't expire before the end of the price guarantee, then your tariff probably won't change.

Standard variable and default tariffs are still likely to rise as prices increase. If your fixed tariff runs out during the price cap, you may be switched to a standard variable one at a higher rate. Always verify your tariff details to see whether you're eligible for any benefits or price cap initiatives.

The government has pledged that even those who do not use gas and electricity for their energy supply will receive qualified assistance until the end of March 2024.

Should you switch energy suppliers?

Switching to a new energy supplier is a viable option, but it might not necessarily be of great benefit. No new fixed-rate energy tariffs are cheaper than the energy price cap, so you probably won't find anything lower. If a supplier ever comes out with a cheaper plan, it will likely only be a very slight difference.

It might be tempting to search for a cheaper deal, but you're better off investing your energy into finding different ways to save on your energy bills.

How you can reduce your energy bill

According to the Energy Saving Trust, heating and hot water account for around 55% of a household's energy bill. So, to reduce your energy bill, you need to adjust your daily energy practices. Here are some ways you can beat the rising energy prices:

• Update your boiler and heating controls - Older boilers tend to cost more to run than modern boilers as they are less efficient. If your boiler is over 15 years old, it’s highly likely that a newer boiler will be able to save you money. If getting a new boiler isn’t feasible right now, you can upgrade to smart heating controls. These can allow for greater planning and scheduling of your heating, which can, in turn, save you up to £840 a year.
  
  
• Book regular maintenance for your boiler and radiator system - For your boiler and radiators to run efficiently, they need to be in the best possible shape. This means keeping a regular maintenance schedule for both systems. Hiring a Gas Safe engineer to service your boiler is essential for both efficiency and to ensure it stays under warranty.
  
  
• Use your boiler efficiently - It doesn’t make sense to have your boiler working as hard in summer as it does in winter. Make sure it’s programmed to suit the needs of the season.
  
  
• Programme or time your heating - With a timer, you can schedule when your boiler turns on and off. Certain programmers may even allow you to set different temperatures for different parts of the day, which can be particularly useful during drastically fluctuating weather conditions.
  
  
• Zone your heating - Invest in separate heating circuits and thermostats for other areas in your house. This would allow you to set lower temperatures for parts of your home that you do not frequently use, saving you money in the long run. Thermostatic radiator valves are a great investment that allows you to set different temperatures in different rooms.

Getting help with energy bills

The general rule is that those struggling to pay their energy bill should always contact their supplier first, as Ofgem rules state that suppliers should offer affordable plans. In addition, they can offer emergency credit for prepayment meters and often have charitable trusts to assist in paying off arrears.

If you're still in a tight financial position despite the energy price cap, there are some other measures that can help you handle your energy bills:

• Households that need support but are not eligible for the Council Tax Rebate can benefit from £144 million in discretionary funding for Local Authorities
• There is a £650 payment for low-income households that receive Universal Credit, tax credits, pension credits and other benefits
• You may become eligible for the Cold Weather Payment if the weather gets freezing
• Those in Scotland with children or a young person under the age of 19 may be entitled to Child Winter Heating Assistance
• Low-income households with high energy bills may be eligible for a one-off discount of £150 through the Warm Home Discount Scheme (running from October 2023 until 31st March 2024)

What about the Energy Bills Support Scheme?

After coming under increasing pressure to do more to help people pay their energy bills in the face of rising prices, the government introduced additional measures - the Energy Bills Support Scheme.

This scheme gave every UK household £400 off their energy bills and was paid in instalments over the period from October 2022 through to March 2023. This scheme has now come to an end, so it is no longer available for people seeking support with their energy bills.