What does Ofgem’s price cap mean for my energy bills?

The typical household energy bill will fall by £122 a year from July, but will still remain well above pre-pandemic levels.

What can households expect over the coming months, and are years of exorbitant energy bills finally coming to an end?

– What is Ofgem’s price cap?

The energy price cap was introduced by the Government in January 2019 and sets a maximum price that energy suppliers can charge consumers in England, Scotland and Wales for each kilowatt hour (kWh) of energy they use.

It aims to ensure that prices for customers on default energy tariffs are a fair reflection of the cost paid by suppliers for wholesale energy, and that the profit firms make is capped.

Ofgem sets its cap every three months as the average amount paid by the typical household.

It is important to note though that Ofgem’s cap does not set a maximum amount for the actual bill households receive – those who use more than the average amount will pay more, and those who use less will pay less.

Energy is regulated separately in Northern Ireland, where prices are also falling.

– Why is the price cap falling?

The fall reflects drops in wholesale energy prices – the amount energy firms pay for gas and electricity before supplying it to households.

The latest cap will see prices fall to their lowest level since Russia’s invasion of Ukraine in February 2022, which caused a further spike in an already turbulent wholesale energy market, driving up costs for suppliers and ultimately customers.

Market volatility led to the cap reaching a staggering £4,279 in January last year, although customers were partly shielded from this by the Government’s Energy Price Guarantee, which limited the average bill to £2,500.

Analysts Cornwall Insight said the lower cap suggested that the UK has, for now, weathered the storm of Red Sea tensions, securing a steady supply of LNG (liquefied natural gas) through the Atlantic.

Good availability of supply in Europe and Asia, in part due to mild weather, has also contributed to the drop in prices.

– What is this year looking like in terms of energy bills?

If the forecasts are accurate, however, the cap will rise again in October.

Ofgem chief executive Jonathan Brearley told the Energy Security and Net Zero Committee this week that prices “are still significantly higher than they were before, and when we look further out our best estimate is that prices are going to stay high and volatile over time”.

– So are we going to see a return to sky-high energy bills?

Unfortunately, Cornwall Insight – whose forecasts have consistently been near identical to Ofgem’s actual price rises and falls – says it does not expect energy prices to return to pre-Covid levels before the end of the decade at the earliest.

And it warned that prices remain subject to wholesale market volatility, with the UK’s reliance on energy imports meaning that geopolitical incidents could continue to have a significant impact.

What if I’m on a prepayment meter?

Households on prepayment meters will pay the same as those on direct debit after Ofgem decided to start balancing standing charges between prepayment and direct debit customers from April.

This will stop prepayment customers having to pay more than others for their energy.

Ofgem says this change means prepayment customers who get their electricity and gas from the same supplier will save around £52 a year because of this change, while people who pay by direct debit will pay an extra £10 per year to account for it.

Will the falling price cap mean the return of switching?

It is expected that more competitive fixed deals may return to the market amid the predicted relative stability of prices over the coming months.

Which? has advised that for those on a fixed deal who think they might be paying more than the price cap come the summer, it could be worth checking the exit fees to see if they would save money by leaving early.

The watchdog said: “As a rule of thumb, we wouldn’t recommend fixing a contract longer than 12 months, higher than the July price cap or with significant exit fees.”