What is the energy price cap? Ofgem rule change explained

Ofgem has announced that it may add two new reviews per year, one in January and a second in July, meaning the invoice price cap would change twice as often.

The regulator said the change from the current twice-yearly adjustment, which takes place in April and October, will help customers when wholesale gas prices fall from current highs by passing the savings on to households more quickly.

It will also protect troubled energy suppliers when prices rise in international markets, by ensuring that they do not have to supply energy to consumers at a below-market price for more than a few months.

Ofgem hopes the proposed changes, which would see the price cap reviewed every three months instead of every six, could come into effect from October following a consultation.

This would mean that the first change under the new system would be made in January.

Jonathan Brearley, Chief Executive of Ofgem, said: “Today’s proposed change would mean that the price cap would better reflect current market prices and any price decreases would be passed through to consumers more quickly.

“It would also help energy suppliers better predict how much energy to buy for their customers and reduce the risk of further supplier failures, ultimately driving up costs to consumers.

“The last year has shown that we need to make changes to the price cap to enable suppliers to better manage risks in these unprecedented market conditions.”

The energy price cap limits how much energy companies can charge their customers and is updated by Ofgem every six months.

It will be reviewed and amended in October and April and is currently at a record high of £1,971 a year for the average household after global gas prices soared.

The change in April this year caused bills for around 22 million UK households to increase by £693 a year after a price increase of 54%. For customers with prepaid meters, the price cap increased by £708 to £2,017.

The price cap is based on wholesale energy prices and supplier costs, which are up 250% since January and 70% in August alone.

The price hike was fueled by a cold winter across Europe last year which meant gas was being used up faster, putting pressure on global supplies and therefore gas inventories are much lower than normal.

Unusually warm weather in Asia also meant more households were using gas for air conditioning, which in turn meant more gas was being burned than usual, and supplies from Russia were reduced due to political measures.

Ofgem is currently reviewing the price cap in April and October, meaning energy bills could start to rise again later this year.

The latest forecasts suggest bills could rise to nearly £2,600 in October, when the next price adjustment is due, with the rise reflecting the impact of Russia’s war in Ukraine for the first time.

Mr Brearley said proposed changes to review the price cap four times a year would mean bills could rise faster, but added they would also fall faster.

He told Sky News: “Remember the total cost you pay over the year would be absolutely the same as that just reflects the cost of the energy we buy.

“Yes, the price would go up faster if prices go up, but just as importantly, if those prices go down, the price cap goes back down.

“I remember the 2010s when people watched their prices go up and waited and wondered why prices didn’t go down just as fast.

“The good thing about the price cap is that we will ensure that it only reflects costs and therefore only reflects what you are paying for your energy.

“With the Russian invasion of Ukraine, we see a continued increase, another increase in gas prices. So the difficult news I have is that prices are likely to rise again in October.”