What is the energy price cap, when does it change, and how does it affect gas and electricity bills?

The price cap is updated four times a year and directly impacts the cost of your energy bills. Credit: PA Images

A new two-year plan will see the government limit the price suppliers can charge customers for units of gas - replacing the existing price cap set by regulator Ofgem.

But what exactly is an energy price cap - and how does it impact how much you pay for energy bills? Read on to find out.

What is an energy price cap?

The price cap was first introduced by energy regulator Ofgem on 1 January, 2019.

It is intended to protect against overcharging by limiting the amount that suppliers can charge for each unit of gas and electricity - measured in kWh (kilowatt hours).

A price cap does not mean a cap on your total energy bill. It is a cap on how much suppliers can charge for each kWh of energy used, together with a maximum daily standing charge.

Your bill will go up or down depending on how many units (i.e. how much energy) you use.

The standing charge covers the cost of supplying your home with gas and electricity. You pay a fixed daily amount for this, regardless of how much energy you use - and even if you're not home.

Suppliers can't charge more than the price cap, although they may charge less.

How is the energy price cap calculated?

The price cap is based on a range of costs that energy suppliers face. These include:

  • Wholesale energy costs - the wholesale price of gas and electricity. This makes up around half of your bill, and can change depending on market conditions. If wholesale prices rise, it will be reflected in customers' bills.

  • Network costs - the cost of building and running the pipes and wires that bring energy to your home. They vary by region, so there are different price cap levels for different areas.

  • Operating costs - the costs that suppliers incur for administration like billing or meter reading services.

  • Policy costs - relating to government initiatives, such as saving energy or reducing emissions.

There is also a profit margin, so that suppliers can reap a return.

Average annual bills could increase to more than £3,500. Credit: PA Images

Does the price cap vary from person to person?

The price cap can vary depending on where you live, how you pay, and what type of meter you have.

The cap is lowest for those paying by direct debit. This payment method is cheaper for suppliers, so this is reflected in the cap.

If you prepay for your energy, the price cap is set higher. Ofgem says it costs more to bill customers with prepayment meters, compared to those paying by direct debit.

The cap is higher again for those who pay quarterly, or by cash or cheque, to reflect the costs that energy companies incur for processing this type of payment.

The costs associated with physically transporting energy to your home vary by region, so there are different price cap levels for different areas of the UK.

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How often does the energy price cap change?

Ofgem recently announced that the cap will be updated quarterly, rather than twice a year.

It will now be updated four times a year - in October, January, April and July.

The regulator said this decision was taken so that prices reflect gas and electricity costs more quickly and accurately, and aren't lagging behind changes in the market.

But critics say it could see energy bills increase four times a year, rather than two - putting more pressure on households.

However, the new £2,500 "energy price guarantee" will apply in England, Scotland and Wales from October 1, with the same level of support made available to Northern Ireland, which has a separate energy market.

The guarantee is based on the existing cap, plus the already promised £400 energy bills discount for all households, meaning costs will be similar to those faced today.

The price cap can vary depending on where you live and how you pay. Credit: PA Images

How does the energy price cap affect me?

A change to the price cap will affect you if you are on a default or standard energy tariff - also known as a variable rate tariff.

If you never switched to a new tariff after your existing deal ended, you will have been moved to your supplier's variable tariff.

This is also likely to be the case if your supplier stopped trading and you were moved to a new supplier - unless you chose to switch again.

If you are on a variable tariff, it means the price you pay for each unit of electricity and gas can increase or decrease, along with your standing charge. This can happen if Ofgem changes the price cap, or if the cost of wholesale energy changes.

You will be affected whether you pay by direct debit, standard credit or pre-payment meter.

If you are on a fixed-term energy tariff, you will not be affected if the price cap rises. This is because for the duration of your deal - usually 12-24 months - the price you pay per unit is fixed and will not rise.

You are also not affected if you have chosen a standard variable green energy tariff that Ofgem has exempted from the price cap.

If you are unsure which tariff you're on, have a look at your bill, or contact your supplier.

When might I see a difference in my bills?

Customers on standard variable tariffs will see the rates change from October 1, when the price cap changes.

The current price cap came in on April 1 and will remain in place until September 30.