UK Households have been warned of a difficult autumn and winter ahead as energy prices are set to continue their upward trajectory to unaffordable levels for millions. With the price of wholesale gas having risen to more than three times the level from the start of the year, the extreme price of energy is a key component of the current cost of living crisis.
The maximum energy price cap has subsequently surged accordingly. The next update in October is set to be announced over the coming weeks, with forecasts predicting even further rises.
This increase reflects a change in calculation methodology in addition to the rise in wholesale prices. Market changes are also set to hit consumers quicker due to the regulator changing the regularity of price cap updates to every three months from October.
Read more: Proportion of income spent on energy may double in October
What is the current energy price cap?
The most recent energy price cap level came into effect at the start of April earlier this year. Announced in February, the new price cap was set at £1,971 a year, representing a 54% increase on the previous cap of £1,277.
When will the next energy price cap be announced and how much could it be?
The energy price cap would previously be updated every six months. However, it was recently announced that this gap would be shortened to three months, leading to four different changes in 2023.
The next price cap change will come into force in October, later changing again in January, April and July. The level is expected to dramatically increase, with energy analysts Cornwall Insights forecasting a cap as high as £3,582, before a further surge to £4,266 in the three months between January and March.
You are advised to tell your energy firm your gas and electricity meter readings as late as possible on September 30 to avoid being charged at the higher rate when the new cap comes into force the following day.
Who sets the energy price cap?
Regulator Ofgem introduced the energy price cap at the start of 2019, aiming to prevent millions of households from being ripped off. Ofgem’s website states that their role is to “protect consumers by working to deliver a greener, fairer energy system”.
How does the energy price cap work and how is it calculated?
The energy price cap stipulates a limit on the maximum amount you can be charged for each unit of gas and electricity used, based on an estimate of the average household user. This means it’s not the maximum possible cost to a household as if you burn a higher number of units, your energy bills will exceed the cap while if you use less, you'll pay less.
A maximum daily standing charge - the cost of getting the power to your home - is also incorporated. The cap is determined by the costs faced by energy suppliers.
Wholesale energy represents the largest cost, with the regularity of cap changes being due to constantly fluctuating wholesale prices. Ofgem are also able to factor in an ‘adjustment allowance’ (any special, unexpected costs) into the price.
The price cap is also made up of network, operating and policy costs, as well as VAT and earnings. The amount is set differently depending on if you pay by monthly direct debit, pay quarterly or on the receipt of a bill or prepay for your energy.
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