What is the energy price cap? How the Ofgem price cap could affect you in 2023

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 four times a year. Although there aren't many energy switching deals available at the moment, it's always worth regularly comparing energy deals to check your eligibility.

What is the current energy price cap?

While the cap level has been frozen since October 2022, the price cap mechanism has still been running in the background. The cap would have risen to £4,279 per year in January 2023 without the Energy Price Guarantee fixing the level at £2,500. In February 2023, Ofgem then announced that the cap would reduce to £3,280 in April.

The good news is that this is the second price cap decrease in a row after four consecutive increases, mainly due to the fact that volatile wholesale energy prices are beginning to settle down and provide customers with some price stability - albeit with prices higher than they were two years ago.

Because the price cap level will be below £2,500 from July, the EPG will become obsolete and the price cap will again become the prevailing standard variable tariff cap for customers to be aware of. It also opens the door for suppliers to potentially start offering fixed deals again, which would offer customers some sorely needed price certainty again.

How will the 2023 energy price cap affect my 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.

The cap rate only applies to standard variable 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.

Fixed deals largely haven't been available since the start of the energy market crisis in the autumn of 2021. However, there should now be scope for suppliers to offer fixed deals to customers with energy prices stabilising. Make sure your details are up to date so you're ready to act as soon as fixed deals return below.

What if I'm struggling to pay my energy bills?

In the autumn, the government announced a package of relief measures designed to help alleviate financial pressure on UK households. These include a £400 discount on electricity bills 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.

There are also several means-tested payments that will be allocated towards the end of the year:

• £300 one-off payment to pensioner households

• £650 one-off payment to those receiving certain work benefits, such as Universal Credit payments

• £150 one-off payment to those receiving certain disability benefits.

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.

December 2022 energy bills help update

In December 2022, the government announced a new package of help measures for energy customers who might otherwise have slipped through the cracks for support.

• EBSS Alternative Funding totals £400 for those in England, Wales and Scotland who don't have a direct relationship with an energy supplier

• The Alternative Fuel Payment is a £200 payment that helps households in England, Wales and Scotland which use alternative fuels (such as biomass or heating oil)

• Households in Northern Ireland will receive a £600 payment which combines the EBSS and the Alternative Fuel Payment.

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 £2,077 was announced alongside the new SVT cap - this will also be valid from July to October 2023.

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, rather than being able to spread those costs over a longer period of time. This reasoning is why the cap will now be reviewed four times a year, with Ofgem hoping that any wholesale cost savings can be more quickly passed on to customers.

• 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. A price cap 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 (usually) save by at least switching your energy tariff, if you’re not keen on switching suppliers.

Ofgem can raise or lower the level of the cap depending on the wholesale market and, at the moment, the cap is likely to increase slightly in the autumn of 2023.

How is the energy price cap calculated?

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 four times a year in January, April, July and October. The next review is set to take place in August 2023 for the October update.

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 over time?

FAQs