Ofgem price cap falls to £1,690 - saving millions of households £238 a year
Millions of households will finally see their energy bills fall by a substantial amount after Ofgem announced its new price cap.
The price cap will drop by around 12% from this April. It means the typical dual fuel household paying by direct debit can expect their annual bill to drop from £1,928 a year to £1,690, a fall of £238. The new price cap will come into effect on April 1 and will last until June 30, when it will be revised again. It is the lowest price cap level since February 2022.
Ofgem has today announced it's going to permanently reduce standing charges for prepayment meter customers - but standing charges for direct debit customers and those who pay on receipt of bill will rise. Ofgem has also introduced a temporary additional payment of £28 a year to to cover the cost of customers who fall behind on bills. Prepayment metre customers won't be affected by this extra charge.
Despite the upcoming overall drop in the price cap, energy bills are still far higher than what they used to be. At its lowest point, and under the latest measurements used by Ofgem to calculate energy consumption, the price cap was an equivalent of £993 a year in the winter of 2020, before gas and electricity costs started rising.
On top of this, households are also no longer benefiting from the temporary £400 energy discount that was in place in winter 2022/23. The price cap covers around 29 million people in England, Scotland and Wales. However, despite what its name suggests, there is not actually a total cap on what you can pay for energy.
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Jonathan Brearley, CEO of Ofgem, said: “This is good news to see the price cap drop to its lowest level in more than two years – and to see energy bills for the average household drop by £690 since the peak of the crisis – but there are still big issues that we must tackle head-on to ensure we build a system that’s more resilient for the long term and fairer to customers.”
Dame Clare Moriarty, Chief Executive of Citizens Advice said: “It’s good news that the cost of energy is falling, but the impact of sky-high prices will be felt for years to come. We know more than five million people live in households behind on their energy bills and, with the price of energy still far higher than just three years ago, many people will struggle to pay off these debts.
“The government promised a new plan for energy bill support by April 2024 but will miss its own deadline. And the withdrawal of cost of living payments this spring will make it so much harder for many of those already finding it difficult to make ends meet. Without action, people will face a cycle of winter crises year after year.”
What is the Ofgem price cap?
The Ofgem price cap does not set an actual limit on what you could pay for energy - this means your bill may be more or less than the headline figure, depending on how much gas and electricity you use. Instead, the Ofgem price cap sets a limit on the unit price of gas and electricity, as well as the maximum daily standing charge.
Standing charges are fixed daily amounts you have to pay to be connected to the power network. You have to pay it no matter how much energy you use. The price cap figure is used to describe what someone with typical energy consumption can expect to pay each year, based on how much Ofgem estimates the typical household uses.
Ofgem recently changed how much energy it assumes an average household uses, due to people using less gas and electricity to save money. Ofgem estimates the average household consumes 2,700 kwh of electricity and 11,500 kWh of gas over 12 months.
To confuse matters further, where you live also affects how much you pay - as there are regional variations in terms of unit rates and standing charges. The headline number is used to give an average across England, Scotland and Wales. Finally, there are also different rates for prepayment customers and those who pay on receipt of bill.
How much are the unit rates and standing charges?
Even though unit prices are coming down, standing charges for direct debit customers will rise from £303 a year to £334. The unit rate for gas is falling from 7.42p per kilowatt hour (kWh) to 6.04p per kWh, but the standing charge will rise from 29.60p a day to 31.43p a day.
The unit rate for electricity is dropping from 28.62p per kWh to 24.50p per kWh. The standing charge for electricity is rising from 53.35p a day to 60.10p a day. There are different unit rates and standing charges for prepayment customers and those who pay on receipt of bills.
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I have a prepayment meter - how much will I pay?
The price cap for the typical household with a prepayment meter is falling to £1,643 a year. This is now the cheapest way to pay for energy, as prepay standing charges have been lowered to equalise them with direct debit customers.
For those who pay on receipt of their bill, the figure is £1,796 a year. These are typically households that don't have a direct debit or prepayment meter set up. This is the most expensive way to pay.
Who is on the Ofgem price cap?
The Ofgem price cap is applied to "default" tariffs which are also known as standard variable rate (SVR) tariffs. You'll be on one of these if you're not locked into a fixed deal, or you didn't switch to a new tariff when your previous fix expires.
You're also usually placed onto a SVR tariff when you move home, or if you're moved to a new energy supplier if your existing one has gone bust. You can contact your current energy supplier to see what type of tariff you're on.
How does Ofgem calculate its price cap?
Ofgem looks at lots of different elements when deciding its price cap, with the biggest one being the cost of wholesale energy. The assessment period for wholesale energy prices for the new price cap was from November 16, 2023, to February 15, 2024.
It also takes into account 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 updates its price cap every three months. It used to be changed every six months but Ofgem started updating it more regularly to reflect changing wholesale prices.
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