​​​​​​​What is the energy price cap?

The energy regulator Ofgem has announced that the price cap will rise to £1,928 for Direct Debit dual-fuel customers on a standard variable tariff from 1 January 2024. This figure uses Ofgem’s new definition of ‘average energy use’ known as the Typical Domestic Consumption Values (TDCV). Ofgem sets the maximum amount that suppliers can charge for each unit of electricity and gas but not the total bill, so if you use more, you will pay more.

This keeps the price cap below the government’s Energy Price Guarantee (EPG) meaning that residential customers' bills will still be determined by the price cap. Ofgem’s January 2024 price cap has been announced, so we thought it would be the right time for a quick refresher. Understanding your energy prices can feel confusing, especially over the past year when there have been so many changes. That’s why we’ve broken it down for you. Plain and simple.

What is the price cap?

Simply put, the price cap is the maximum price per unit that your energy supplier can charge you for your energy. It also includes the maximum they can bill you for your standing charge too. The price cap figure is an average, you will pay more or less depending on your energy consumption. The specific unit rates each customer sees will vary by region and payment type. The government introduced the price cap in 2019. It is set by the energy regulator Ofgem and reviewed four times a year.

What is changing in the January 2024 price cap?

Ofgem has announced the price cap is changing on 1 January 2024. Unit rates will increase for all customers. Standing charges also vary depending on the method of payment and the region you live in, but will change for all customers. Ofgem has changed their definition of ‘average energy use’. Ofgem’s old definition of average energy use, known as the Typical Domestic Consumption Values (TDCV) has changed to more closely reflect the current average energy use. Typical annual household consumption is now estimated to be 2,700 kWh a year for electricity, and 11,500 kWh a year for gas. Learn more about Ofgem’s average electricity and gas usage.

How will the January 2024 price cap affect your bills?

Between October 2022 and June 2023 the price cap did not determine your domestic bills. The government brought in the Energy Price Guarantee (EPG) to protect customers from rising bills. The EPG was set at £2,500 until 30 June 2023. With Ofgem’s July price cap dropping below the £2,500 EPG level the government support is no longer in effect. Meaning that customers' prices are once again determined by Ofgem’s price cap. The government raised the threshold of the EPG to £3,000 from 1 July 2023. With January’s price cap set to remain below the EPG it will still be the price cap that continues to determine your energy prices. The Energy Price Guarantee is a discount on consumer energy prices that aims to keep the average household bill below £3,000 a year (£2,500 between October 2022 and June 2023) to reduce the impact of recent rises in wholesale energy costs. We have a range of financial support and independent advice available to help you through the changes. Learn more and get support with your bills.

How is the price cap calculated?

The price cap is calculated based on multiple factors that make up the cost of supplying your energy. However, wholesale energy prices are usually the main one that affects changes. In fact, wholesale prices are responsible for around 75% of the cost of the average energy bill (on tariffs equal to the price cap)*.

What makes up the price cap: Wholesale prices.

These are prices that suppliers like us typically pay when buying gas or electricity to supply our customers. The supplier purchases energy for their customers on the wholesale market far in advance of when they need to supply that energy to you.

Adjustment allowance.

This is an allowance for any unexpected extra costs that may arise, such as from supplier failures.

Operating costs.

These represent the costs to your supplier to deliver its services to you. They include sales, metering, billing, and general customer service costs.

Network costs.

These costs are for maintaining, running, and upgrading the gas pipes and electricity cables that carry energy across the country into your home or business. Network companies charge your supplier an Ofgem-regulated price for using the energy network.

Policy costs.

These costs relate to government led social and environmental schemes, such as the Feed in Tariff and Renewable Obligations schemes which are designed to help reduce emissions, save energy and encourage the transition to renewable energy.

VAT.

Value Added Tax is set at 5% for energy bills.

Payment method costs.

Ofgem have set a Payment Method Uplift, to account for the additional costs associated with providing service to customers who don’t pay by Direct Debit. This is also why it is often cheaper to pay for your energy by Direct Debit.

Smart.

The Government is committed to making sure all households and small businesses can benefit from smart meters as soon as possible. The smart meter rollout allowance was introduced in June 2020, to help cover the cost of supplying them to customers. Interested in getting one in your home? Learn more about the benefits of smart meters and book your installation.

Headroom allowance.

This is a small extra allowance for uncertainties in the costs incurred by suppliers.

Earnings.

Ofgem accounts for a fair rate of return for energy suppliers within the price cap. This makes up around 2% of the average bill*.

Support with your bills.

We want to reassure you that we are dedicated to helping you where we can. We have put together some helpful resources where you can access support from us, charities and the government.

Contact our Energy Specialists if you’re having difficulty.

Our Energy Specialists are here to help you if you’re concerned about your energy bills or need advice with moving. If you’re struggling to pay, please visit our help page to find out more about how we can support you. You can reach out to our Energy Specialists for personal advice on Facebook and Twitter.

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