October 2022

Understanding the energy price cap

The news about increasing energy costs is understandably dominating the personal finance pages and has its roots in the conflict in Ukraine which has seen the Russian government reduce the amount of gas it exports to Europe in retaliation for the sanctions imposed on Russia for invading Ukraine1. The result is that, as we approach autumn and winter, demand for power is outstripping supply. Wholesale costs therefore rise and these increases are passed on to consumers.

According to the Office of Gas and Electricity Markets (OFGEM), the government regulator for the electricity and downstream natural gas markets in Great Britain, the price cap for energy (as of the 1st of October 2022) is now called the Energy Price Guarantee. It is described by OFGEM on their website as follows:-

“To help protect consumers, the Government has announced the Energy Price Guarantee which comes into effect on 1 October 2022.

This new scheme will reduce the unit cost of electricity and gas so that a household with typical energy use in Great Britain pays, on average, around £2,500 a year on their energy bill.”

On average usage, a household will save £1,000 a year (based on current prices from October). Energy suppliers will be fully compensated by the government for the savings delivered to households. 

For an individual customer, the amount paid under the Energy Price Guarantee will vary depending on how much energy they use, where they live, how they pay for their energy and their metering arrangement. The £2,500 figure is based on a household with typical consumption on a dual electricity and gas bill paying by direct debit.’

There is, however, a common misunderstanding about the Energy Price Guarantee. The £2,500 figure is an average maximum of what households could be paying but not a maximum cap on costs, and is based on a typical consumption of a household on a dual electricity and gas bill paying by direct debit.

According to OFGEM’s website, from the 1st October, the costs are:-

Electricity 
 
£0.34 per/kWh
 Daily standing charge: £0. 46
 Gas£0.10 per kWh
 Daily standing charge: £0. 28

This means that while your supplier cannot charge anymore per unit, you are still responsible for how many units you use. So, without changing how you manage power in your house, you bills could very well exceed the £2500 average annual maximum cost that the government is predicting the average householder will have to pay. 

Sources

  1. BBC (2022) What is the energy price cap and what will happen to bills? Available at: https://www.bbc.co.uk/news/business-58090533 (Accessed 28 October 2022).
  2. OFGEM (2022) Energy Price Cap Explained. Available at: https://www.ofgem.gov.uk/information-consumers/energy-advice-households/check-if-energy-price-cap-affects-you (Accessed 28 October 2022)

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