How does the energy price cap work? What is the Ofgem energy price cap? UK energy price cap 2022 rise

UK energy regulator Ofgem has revealed the energy price cap will now be updated quarterly rather than every six months in another blow to consumers – here’s what the energy price cap 2022 is and how the price cap works

Energy customers in Scotland and the rest of the UK are facing big bill increases every three months rather than ever half-year after Ofgem revealed changes to the price cap.

The energy markets authority also warned of a ‘very challenging winter ahead’ with the cost of living crisis linked to energy prices set to deepen.

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Ofgem announce major change as energy price cap to be updated quarterly
Ofgem has confirmed that the energy price cap will be updated quarterly, rather than every six months, as it warned that customers face a “very challenging winter ahead”. Image: PA

The regulator argues the changes to the cap will offer stability for the market which has been struck by Russia’s invasion of Ukraine. Ofgem added it is “not in anyone’s interests for more suppliers to fail and exit the market”.

So what is the energy price cap, what are the changes to the price cap, why are bills likely to keep rising and what can be done to cope?

What is the energy price cap?

Introduced by the UK Government in 2019 and regulated by energy regulator Ofgem – originally the Office of Gas and Electricity Markets – the energy price cap places a limit on how much suppliers can charge UK households on default tariffs.

The price cap regulates the cost of energy units and is supposed to ensure that customers do not pay excessive amounts for their gas or electricity – or are not vulnerable to competitive behaviour of dominant market players. It is currently reviewed by regulator Ofgem every six months based on a set of rules – this is changing

How does the energy price cap work?

A key part of its role is to set a limit – the price cap – on what energy firms charge customers on default, or standard variable, tariffs.

Variable tariffs have previously been more expensive than fixed-rate deals and people are often on these tariffs if they have never switched suppliers, a fixed term has ended or their supplier has gone bust.

There is also a separate price cap for customers on prepayment meters.

On a standard energy bill, the price cap governs the maximum standing charge and price per kWh of gas and electricity that your supplier can charge you.

How much is the energy price cap 2022?

Ofgem revealed on Tuesday May 23rd that the energy price cap is expected to increase by a further £830 to £2,800 in October. Experts previously warned in 2021 that rising energy costs could possibly see a 14% price cap hike from April 2022.

Then Adam Scorer, chief executive of National Energy Action, said: "Ofgem's warning that the price cap will rise again by over £800 in October will strike terror into the hearts of millions of people already unable to heat and power their homes. It will plunge households into deep, deep crisis. The financial, social and health impacts are unthinkable.”

The Resolution Foundation said almost 10 million households could find themselves in "fuel stress" this winter if Ofgem's prediction comes true.

The next change will be announced at the end of this month and take effect in October.

Ofgem chief executive Jonathan Brearley suggested in May it is likely to soar to “the region of £2,800” for an average household, but he has since warned of a significant increase over and above the estimate made in May. “That just shows you how dramatically the market is changing,” he said.

Ofgem has now confirmed it will update the price cap quarterly because the market is moving so quickly and it is not sustainable for people to pay a rate up to six months old.

Why are energy prices increasing?

The recent surge in energy prices has been driven by wholesale prices, specifically the soaring cost of gas.

Gas prices on global markets have surged by as much as six-fold, having leapt higher before the invasion of Ukraine.

Last year, countries in Asia and Europe used significant amounts of gas stocks during a long winter which helped to drive up prices while the reopening of economies also sparked higher energy usage.

More recently, the invasion of Ukraine by Russia has led to a restriction of Russian gas which has in turn pushed prices higher.

In the UK, very little gas is sourced from Russia but this has not shielded suppliers from the pricing impact across the rest of Europe, which typically sourced around 40% of natural gas from Russia.

What can customers do if they are worried about their rising energy bills?

Ofgem suggests contacting your supplier as soon as you can if you are worried about paying your energy bills or are in debt to your supplier.

Suppliers must work with you to agree on a payment plan customers can afford under Ofgem rules.

People can ask for more time to pay, access to hardship funds and payment breaks or reductions under the potential options.

Some energy companies offer certain schemes, for example, if someone is making their home more energy-efficient or offering free boiler checks and upgrades.

Some people may also qualify for particular forms of help such as Winter Fuel Payments or the Warm Home Discount Scheme. Some charities may be able to offer grants.

Ofgem has particularly urged consumers not to join the “Don’t Pay” group, which asks people to add their names to a pledge to cancel their direct debits for gas and electricity from October 1 in protest against soaring costs.

The regulator has warned this will only result in higher costs for everyone and could lead to personal debt problems.

Additional reporting by PA.


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