The Ofgem price cap does not put a limit on how much you can pay for energy – instead, it sets the maximum unit price you can be charged for gas and electricity
Millions of people will see their energy bill rise again this winter after Ofgem announced its new price cap.
The price cap is rising by around 1.2% from January 1. This means the average dual fuel household paying by direct debit will see their annual bill go up from £1,717 a year to £1,738 – an increase of £21. The rise will come into effect during the coldest months and at a time when millions of pensioners have been stripped of their Winter Fuel Payment, worth up to £300.
It is also the second increase in energy bills in recent months, after the price cap went up by 10% – or an average of £149 – in October. Ofgem updates its price cap every three months, so the new rates will remain in place until March 31, when it will then be revised again.
The price cap for someone paying by pre-payment meter is rising from £1,669 a year to £1,690, while for someone paying on receipt of bill, the figure is going up from £1,829 a year to £1,851. To work out your new energy bill, if you spent £100 each month on gas and electricity, your new bill will be £101.
The price cap covers around 26 million households in England, Wales and Scotland. But despite what its name suggests, the price cap does not actually limit how much you can pay for energy. If you use more energy, you’ll pay more – or use less energy, and your bill will be less.
Tim Jarvis, director general of markets at Ofgem, said: “While today’s change means the cap has remained relatively stable, we understand that the cost of energy remains a challenge for too many households. However, with more tariffs coming into the market, there are ways for customers to bring their bill down so please shop around and look at all the options.
“Our reliance on volatile international markets – which are affected by factors such as events in Russia and the Middle East – means the cost of energy will continue to fluctuate. So it’s more important than ever to stay focused on building a renewable, home-grown energy system to bring costs down and give households stability.
“In the short term though, anyone struggling with bills should speak to their supplier to make sure they’re getting the help they need and look around to make sure they’re on the best, most affordable deal for them.”
What is the Ofgem price cap?
The Ofgem price cap does not put a limit on how much you can pay for energy – instead, it sets the maximum unit price you can be charged for gas and electricity, as well as the maximum daily standing charge, which is a fixed fee that you pay to be connected to the grid.
This means your bill is still based on the actual amount of energy you use. The headline price cap figure represents what the average billpayer will pay. Ofgem estimates that the average household consumes 2,700 kwh of electricity and 11,500 kWh of gas over 12 months.
But again, if your energy usage is a lot less than this, then your bill will be lower than the main price cap figure – while high energy users will pay more. There are other factors to take into account. Unit rate prices vary by region, so your location can also effect your bill, and there are different rates for prepayment customers and those who pay on receipt of bill.
The headline price cap rate is for someone with typical use who pays by direct debit. Confusingly, the energy price cap figure represents a yearly bill, but it is updated every three months so Ofgem to reflect changing wholesale costs.
Who is affected by the Ofgem price cap?
There are 26 million people who are on the price cap. You are covered by the price cap if you’re on a “default” or standard variable rate (SVR) tariff – so basically, if you’re not locked into a fixed deal, or you didn’t switch to a new tariff when your previous fix expired. You may also roll onto an SVR tariff when you move home, or if you’re moved to a new energy supplier if your existing one has gone bust.
All different types of payment methods can be covered by the price cap, including direct debit, prepayment meter and paying on receipt of bill. You can contact your current energy supplier to see what type of tariff you’re on, and to check you’re not being charged above the maximum rates allowed under the price cap.
How does Ofgem calculate its price cap?
The largest cost that makes up the price cap is wholesale energy, which is what energy suppliers pay for gas and electricity. The assessment period for wholesale energy prices for the January 2025 price cap was from August 19, 2024 to November 15, 2024. There are other elements that are taken into account as well.
Ofgem looks at the cost of maintaining pipes and wires that carry gas and electricity, network and operating costs, as well as VAT, payment method allowances and profits for the energy supplier. Ofgem will announce its next price cap, which will come into force from April 1 next year, by February 25, 2025.
Why are energy bills rising?
Energy prices have fallen since their peak in summer 2023, but are still far higher than they used to be. They first started going up due to higher demand after the coronavirus pandemic, when lockdown measures were eased, and spiked when the conflict between Russia and Ukraine broke out.
Energy analysts at Cornwall Insight told the BBC higher prices are “the new normal” due to “geopolitical tensions, bad weather and maintenance taking place on Norwegian gas infrastructure” in what will be disappointing news for households. At their peak, the price cap rose about £4,000 in the winter of 2023 but the Government introduced a temporary Energy Price Guarantee which meant prices were discounted to £2,500.
