How the UK energy price cap is calculated – and affects your bill
The government’s cap on energy prices, which sets the maximum amount that energy suppliers can charge customers on a default tariff, will raise energy bills for about 22m homes to almost £2,000 a year from April.
It was first introduced by the industry regulator, Ofgem, in early 2019 after the government called for a tool which could put an end to rip-off energy tariffs, and is calculated every six months to reflect the fair costs of supplying gas and electricity.
The catch? The energy price cap doesn’t always make energy prices affordable. Suppliers costs are soaring, which means Ofgem’s energy price cap has reached record levels too.
Here’s how the average dual fuel energy bill breaks down under the price cap.
The wholesale market price of gas and electricity plays the biggest role in determining the average energy bill. For the winter energy price cap, effective last October, market costs made up more than 40% of the total cap, or £528 of the average £1,277 dual fuel energy bill. But in the new price cap from April the market cost is more than twice as high at £1,077.
Energy suppliers typically buy their gas and electricity from the market in advance, so Ofgem determines the cost of buying energy from the market by tracking wholesale prices over a period of six months ahead of the next price cap period.
For example, the price cap in place over the winter months was based on the rising market prices recorded between February and July. However, the new price cap poised to drive bills higher from April was based on surging market prices between August and January when market prices reached record highs.
Experts have warned that market prices today could lead to even higher energy bills, of around £2,300 a year, by next winter.
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