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Latest energy price cap announced by Ofgem

Energy regulator Ofgem has today (Thursday 24 November 2022) announced its quarterly update to the energy price cap for the period 1 January – 31 March 2023.  

The price cap is set to rise to an annual level of £4,279 in January 2023, but bill-payers remain protected under the government’s Energy Price Guarantee (EPG). 

The energy price cap level indicates how much consumers on their energy supplier’s basic tariff would pay if the EPG were not in place.  

The price cap has been in place since January 2019, and it is a legislative requirement for Ofgem to regularly review the level at which it is set. It ensures an energy supplier can recoup its efficient costs, whilst making sure customers do not pay a higher amount for their energy than they should. The price cap, as set out in law, does this by setting a maximum suppliers can charge per unit of energy.  

For the first three months of 2023, the energy price cap will increase to an annual level of £4,279 for an average dual fuel household paying by direct debit based on typical consumption, but bill-payers will still be protected by the Government’s Energy Price Guarantee until the end of March 2024, as confirmed by the Chancellor on Thursday 17 November.  

There is no immediate action for consumers to take as a result of today’s announcement. 

Ofgem continues to protect consumers through its ongoing robust regulation of the market, taking enforcement action where necessary and providing support to those who need it the most. Earlier this week, Ofgem set out the proactive action it was taking against 17 energy suppliers to ensure that consumers are protected this winter and beyond
The next quarterly price cap update will be on 27 February 2023.  

The Energy Price Guarantee protects consumers reducing the unit cost of electricity and gas so that that a typical dual fuel direct debit bill for January 2023 remains at £2,500 and will be increased from April 2023 to a new level of £3000, with cost-of-living payments of £900 for those on means tested benefits, £300 to pensioners, £150 to those on disability benefits and doubling support for those on LPG or heating oil.  

The level is based on typical use for an average household and is a cap on energy unit price not a cap on total bills. For an individual customer, the amount they will pay under the Energy Price Guarantee varies depending on how much energy they use, where they live, and how they pay for their energy. 
The tariff cap was legislated by government in order to protect default tariff customers (i.e. those on standard tariffs) from being overcharged. Ofgem administers the scheme and publishes cap rates on a quarterly basis. 

The methodology for setting the price cap is regularly reviewed by Ofgem.

Section 5 sets out future price cap dates: Check if the energy price cap affects you | Ofgem 
Published cap levels for the charge restriction period 9b of the default tariff cap: 1 January 2023 – 31 March 2023. 

The price cap protects around 26 million customers on default or variable rates on credit meters. The £4,279 per year level of the cap is based on a household with typical consumption on a dual fuel electricity and gas bill paying by direct debit.

Following the 4 August announcement, the price cap will be updated on a quarterly basis. More information on this can be found on the "Ofgem confirms changes to the price cap methodology and frequency ahead of new rate to be announced later this month" press release. Customers who pay by standard credit (cash or cheque) pay an additional £254 based on the higher cost for energy companies to serve them. 

The 26 million customers protected by the price cap includes around 4 million prepayment meter customers. These customers pay an additional £80 compared to those on direct debit, which also reflects the higher cost for energy companies to serve them. The values shown in the text above include VAT and are expressed for the current Typical Domestic Consumption Values (TDCV) of 2,900kWh of electricity, 12,000kWh of gas, and 4,200kWh of electricity for Economy 7. For electricity only customers on Economy 7 meters the direct debit cap level has increased to £2,988 which is an additional £759 compared to the previous cap update. 

The price cap is a cap on a unit of gas and electricity, with standing charges taken into account. It is not a cap on customers’ overall energy bills, which will still rise or fall in line with their energy consumption. From 1 January the equivalent per unit level of the price cap to the nearest pence for a typical customer paying by direct debit will be 67p per kWh for electricity customers and a standing charge of 46p per day. The equivalent per unit level for a typical gas customer is 17p per kWh with a standing charge of 28p per day. 

Breakdown of costs in the energy price cap 
Dual fuel customer paying by direct debit, typical energy use (GB £) 

bar chart of cost stack breakdown

The charts below shows indexed wholesale prices from cap period 9a (Oct – Dec 22) to cap period 9b (Jan – Mar 2023). Wholesale costs make up the majority of a customer’s bill. 
Prior to October 2022 update – we observed wholesale prices for future delivery over an indexation period. This was carried out twice a year, from the preceding February to August for the winter period (October - March) and from September to January for the summer period (April - September). The fixed horizontal lines show the average wholesale cost allowance for each 6 month price cap period based on the price of the relevant forward looking energy contracts (the jagged line). 

From October 2022 - As set out in our 4 August decision document, the October 2022 wholesale allowance calculated within the price cap uses a transitional approach to price indexation compared to previous periods as such they are not directly comparable. 

From April 2022 we will determine the wholesale cost allowance within the price cap four times a year, based on the price of the forward-looking energy contracts over the previous three months. 
The fixed horizontal line representing the November update, January - March 2023, shows a weighted average wholesale cost allowance for the 3 month price cap period based on the price of the relevant forward looking energy contracts and number of observed trading days (the jagged line). 

Wholesale gas price costs in the energy price cap 

line graph of wholesale gas prices

Wholesale electricity price costs in the energy price cap  

line graph of wholesale electricity prices

Data sets behind these graphs are proprietary and can be sourced from ICIS. 

Current government support available for consumers: 

  • Energy Bills Support Scheme: millions of households across Great Britain will receive a £400 non-repayable discount on their energy bills from October this winter. 
  • Warm Homes Discount: a £150 Warm Homes Discount will also begin to be paid to 3million low-income households from October. 
  • Households most in need will be eligible for further support in addition to the Energy Bills discount. This includes: 

- £650 one-off Cost of Living Payment for around 8 million households on means tested benefits; 
- A one-off £300 Pensioner Cost of Living Payment for over 8 million pensioner households to be paid alongside the Winter Fuel Payment; 
- A payment of £150 for around six million people across the UK who receive certain disability benefits; 
- A £500 million increase and extension of the Household Support Fund. 

Information and materials for consumers about the price caps is available at: www.ofgem.gov.uk/energy-price-caps. Information on support and advice for consumers worried about paying their bills is available at: http://www.ofgem.gov.uk/help-with-bills 

For all other non-media related enquiries, please visit our Contact us page

Related links

Channel website: https://www.ofgem.gov.uk/

Original article link: https://www.ofgem.gov.uk/publications/latest-energy-price-cap-announced-ofgem

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