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What is the energy price cap? How the Ofgem price cap could affect you in 2022

What is the energy price cap? How the Ofgem price cap could affect you in 2022

If you’re on a standard variable or default energy tariff, your plan will be subject to Ofgem’s energy price cap.

But what is the price cap and how does it work? Find out everything you need to know about the energy tariff cap — including whether this price cap will help or hurt your bills — right here.

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It's a good idea to compare energy regularly to see what the latest prices mean for you, even though there are fewer deals available. Enter your postcode to get started.

What is the energy price cap?

The energy price cap is a limit on the unit rate and standing charge that energy suppliers can charge for their standard variable - or ‘default’ - tariffs. The rate is set by Ofgem, the energy regulator, and is reviewed twice a year (though there is a consultation open as of 16 May 2022 which would see the cap reviewed every three months).

The price cap is currently in the spotlight because Ofgem announced a record increase of 54% on 3 February 2022, which came into effect on 1 April 2022. The new cap level for average use dual fuel customers is £1,971.

This is the third consecutive increase in the cap level and the second consecutive time it has risen to its highest ever point (£693 more than its previous high of £1,277). This is largely because of the rocketing price of wholesale energy, which meant suppliers had to pay more for it - Ofgem has now increased the cap in order to allow them to recover some of their costs.

How will the price cap affect my bills?

According to a poll on Uswitch's Twitter account, 63% of customers don't know how the price cap will affect their bills.

It's important to remember that the cap is based on unit rates - that's the actual price that is changing - but in order to more clearly and easily report it, the "cap level" is based on an average use dual fuel customer paying by direct debit. This means that you could actually pay more than the cap amount if you live in a bigger house and/or use more energy.

Since the energy price cap was introduced in January 2019, most suppliers have set their default tariff prices very close to the maximum cap rate.

The cap rate only applies to standard variable or default tariffs. These types of tariff are typically the most expensive plan that a supplier offers. In a functioning energy market, if you haven't switched energy before, or you've rolled off a fixed energy deal, you're likely to be on one of these tariffs.

As a result of the energy market volatility, though, suppliers have increased their fixed rate plan prices because they're not allowed to increase their standard variable plan prices. This means that, even though a standard variable tariff at the soon-to-be-implemented price cap level of £1,971 is hugely expensive, it's likely to be cheaper than a fixed rate tariff.

Our video explains more:

Is the government doing anything to help?

Because the price cap has increased by such a large amount, the government has announced a package of relief measures designed to help alleviate financial pressure on UK households. These include a £200 rebate on electricity bills (to be repaid over a period of five years) and a £150 free rebate on Council Tax for those living in bands A-D in England. It's also widening the net of eligibility for the Warm Home Discount and increasing the annual payment from £140 to £150.

Help in Scotland

The Scottish government has announced the allocation of its funding to help deal with the cost of living crisis. This includes £150 to every household in receipt of Council Tax Reduction in any Council Tax band £150 for local authorities to pass on to all other occupied households in Bands A to D. It has also allocated £10 million throughout 2022-23 to continue the Fuel Insecurity Fund, which helps households which would self-ration energy use due to unaffordable fuel costs from having to do so.

Help in Wales

The Welsh government has also pledged to match the £150 Council Tax rebate to all households who live in properties in council tax bands A-D, as well as recipients of the Council Tax Reduction Scheme in all bands. More detail about how the scheme will operate and how payments are made will be announced as soon as possible.

£25m will also be provided to local authorities so they can use their local knowledge to help households who may be struggling.

Further funding will be provided via the Discretionary Assistance Fund and the Winter Fuel Support Scheme, which will deliver an additional £200 later this year to low income households.

To find out more, check out our Q&A.

What is the prepayment meter cap?

The price cap affects the four million prepayment customers in the UK in the same way that it affects those on standard variable tariffs. There is a separate cap for prepayment tariffs, which is reviewed independently of the SVT cap by Ofgem.

A new cap rate of £2,017 was announced in February 2022. This £708 increase also came into effect on 1 April 2022.

It follows a cap rate of £1,309 (an increase of £153) which came into effect in October 2021.

Why is the energy price cap controversial?

There are a few reasons why the energy price cap has come under fire from energy experts:

Significant knock-on costs to customers - Since energy prices increased in September 2021, the cap has been criticised by suppliers for not allowing them to charge more for standard variable tariffs, and this then having the knock-on effect of passing those costs on to customers in one hit when the cap level rises in April 2022, rather than being able to spread those costs over a longer period of time.

Better savings can (usually) be found by switching — This isn't necessarily true anymore given the wholesale energy market situation that has caused fixed deal rates to rocket.

A cap hurts competition — Introducing a cap does not encourage suppliers to compete for business by offering better tariffs or improving customer service. There is no pressure on energy companies to innovate if customers believe they are ‘safeguarded’ from high costs and less likely to take their business elsewhere.

False sense of security — The cap can still go up (or down) as energy prices will always be subject to wholesale costs, distribution costs and other factors. The concern is that consumers will assume the price cap means they are protected from fluctuating costs by the government’s cap.

Does the price cap mean I don't need to switch?

Not usually, no.

It's important to compare energy prices using a price comparison site like Uswitch to find out if you could get a cheaper deal by switching - though as noted above, this is probably not possible due to fixed deals now (in the main) being much more expensive than the cap level of £1,971.

A price cap only applies to you if you’re on a standard variable rate tariff. These tariffs are already some of the most expensive on the market, so it’s likely you could save by at least switching your energy tariff, if you’re not keen on switching suppliers.

Compare energy prices here

It's a good idea to compare energy regularly to see what the latest prices mean for you, even though there are fewer deals available. Enter your postcode to get started.

Ofgem can raise or lower the level of the cap depending on the wholesale market and, at the moment, the cap will probably rise again in October 2022. You may want to secure your rates with a fixed deal, but the price you pay could be much more expensive than the cap level, so staying on an SVT or waiting to roll onto one if you're already on a fixed deal might be the best course of action for you.

How is the energy price cap set?

The price cap is set by Ofgem, the regulator for the energy industry.

The cap level is based on a range of factors, such as the wholesale cost of energy, network costs, policy costs, operating costs and prepayment meter costs.

Ofgem has committed to reviewing the level of the energy price cap twice a year in February and August, effective from 1 April and again from 1 October. The next review is set to take place in August 2022.

Are any suppliers exempt from the price cap?

Ofgem reserves the right to grant temporary or permanent exemptions from the price cap for tariffs and suppliers which make significant efforts to generate and supply green energy to customers. This means that they are allowed to charge rates that exceed the price cap unit rate on SVTs - in other words, the price cap does not apply to them. Ecotricity, Good Energy and Green Energy UK are the three suppliers who have been granted permanent exemption from the price cap.

How has the price cap level changed?

Price cap graph

The price cap was confirmed by Ofgem in September 2018 at an initial cap of £1,136, with a commitment to review the cap level twice a year based on any changes in the wider market.

The cap didn’t actually come into force until 1 January 2019, by which time the rate had been increased by a pound to £1,137. After its first review, it was announced in February 2019 that the cap would be raised to £1,254, effective on 1 April.

The price cap level was next reviewed in August 2019. The rate was reduced by £75 as a response to falling wholesale costs across the continent. The new cap rate of £1,179 came into force on 1 October 2019.

In its February 2020 review, the cap was reduced by £17. On 1 April 2020, the new rate came into force. By this point, the level had changed to £1,126 due to a change in the way Ofgem calculates average usage.

On 7 August 2020, Ofgem revised the price cap rate once again, setting it at £1,042. The new default tariff cap rate came into effect from 1 October 2020.

In February 2021, the cap level was increased by 9% to £1,138, which came into effect from April 2021.

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