How the energy price cap works and why it does not cap your bill
Ofgem's quarterly cap is one of the most quoted figures in household finance, and one of the most misunderstood. Here is what it limits, what it does not, and who it covers.
Every few months the headlines say the energy price cap is going up or down by a certain amount a year. It sounds like a limit on how much any household can be charged. It is not, and knowing the difference helps make sense of your own bill.
What the cap actually limits
The price cap is set by Ofgem, the energy regulator for Great Britain. It puts a ceiling on two things for households on a standard variable tariff, sometimes called a default tariff:
- The unit rate, which is the price you pay for each kilowatt hour (kWh) of gas or electricity you use.
- The standing charge, a fixed daily amount you pay for being connected to the supply, whether or not you use any energy.
Suppliers can charge less than the cap, but not more. Because the cap limits the price per unit and not the total, a household that uses more energy will pay more. There is no maximum bill.
Where the yearly figure comes from. The amount you see in the news, for example a cap of so many pounds a year, is an illustration. Ofgem works out what a household with typical gas and electricity use, paying by direct debit, would pay over a year at the capped rates. Your own bill could be well above or below that figure depending on how much energy you use, the size and type of your home, where you live and how you pay.
How often it changes
Ofgem reviews the cap every three months. New levels take effect on 1 January, 1 April, 1 July and 1 October, and are announced several weeks before each change so households and suppliers have notice.
The cap moves mainly because of wholesale energy prices, which make up a large part of what suppliers pay. Other costs are built in too, including network costs for running pipes and wires, government schemes and suppliers' operating costs.
Why your rates may differ from a neighbour's. The capped rates vary by region, because network costs differ around the country. They also vary by payment method. Customers paying by direct debit, on receipt of a bill, or with a prepayment meter can each have slightly different capped rates.
Who is covered, and who is not
The cap applies to standard variable tariffs in England, Scotland and Wales. Northern Ireland has a separate energy market and is not covered.
If you are on a fixed tariff, the cap does not apply to you while the deal lasts. You pay the rates you signed up to, which may be higher or lower than the cap. When a fixed deal ends and you do not choose a new one, you are usually moved onto your supplier's standard variable tariff, which is covered.
Using the information. The cap gives a useful benchmark. When a new cap is announced, look at your latest bill or app to find your current unit rates and standing charges, then compare them with fixed deals on offer. Comparing unit rates, rather than headline yearly figures, is the clearest way to see what a deal would mean for your own household.
Citizens Advice can help with questions about switching, billing problems or difficulty paying, and suppliers have to offer support to customers who are struggling with their bills.
