The History of Ofgem’s Energy Price Cap

In February Ofgem announced that its energy price cap rate would increase by 54%, pushing the monthly bill of a typical user up by almost £700. The price hike reflects the current price crisis facing the energy market, but it also contradicts the introduction of the capped rate to an extent — join us as we explore more on the energy price cap, and find out what it means for UK residents.

What is the energy price cap and when was it introduced?

An energy price cap is a limit on the maximum price that a supplier can charge its customers per unit of energy used, and it also sets a maximum daily standing charge (the cost of connecting your home to the national grid). The price cap never limits your total energy consumption; if you use more you end up paying more than the set limit. The set rates were introduced in January 2019 by regulatory body, Ofgem, and reviewed every six months following.

Why was it introduced, and how does the energy price cap work?

The cap was introduced to help homeowners avoid having to fork out on extortionate bills, and to prevent suppliers from making excessive profits from consumers. The rate was intended to limit costs associated with the most expensive rates on standard and default variable tariffs.

However, as market prices soared, rate differentials narrowed on the whole, giving homeowners no clear cheaper option — exposing the first flaw of the cap: when prices go up, the cap rate follows.

What does the latest cap increase mean for households?

The 54% energy cap increase announced on 3rd February 2022 has drastically increased the price that suppliers can charge customers These are the cap change increases you can expect to see:

• Increase of £693 to the current limit for standard/default variable tariffs, making the new cap limit £1,971 per year.
• Increase of £708 to prepayment tariffs, taking the new cap limit to £2,017 per year.

Current standard daily charges and April 2022 rates

The cap increases are largely as a result of rising wholesale energy costs. Wholesale energy prices are so high as a result of global issues such as easing lockdown restrictions increasing demand, but there are other problems closer to home too. These include low wind levels, which have led to lower renewable energy generation, and an outage at a National Grid site in Kent that has knocked out a power cable that runs between England and France. The UK also has some of the lowest gas reserves in Europe, which means there is almost no way of stockpiling gas to use when needed.

The cap accounts for both fuels, but respectively, gas costs have increased by 81% whereas electricity rates have jumped by 36%. Around 23 million homes in the UK are heated by gas boilers, favoured as the cheaper, more convenient option. The increased cap rates could trigger a shift amongst homeowners though, and many may consider switching to electric heating. While there might be savings to be had in the long run by changing to electric heating, there are still initial expenses that won’t amount to any significantly lower monthly bills than the figures we can expect to see from the new capped gas rate.

For homeowners who want to make the change, investigating tariff options is key. On certain tariffs, and depending on when you use your heating, savings may be possible. However, customers are once again stuck with no clear advantage — over time and because of market climate and future cap rates, bills may not stray much at all from the proposed new figure.

With genuine concern around the rise of fuel poverty once the cap rate increases in April, a government-backed £200 rebate scheme has been actioned, and is expected to launch in October 2022 as homeowners adjust to the new rates.

The Ofgem energy price cap history & timeline

Throughout the energy price cap history, no rate increase has taken as steep of an incline as the April 2022 announcement.

Ofgem energy price cap period and annual rate (GBP p/year)

Critics of the price cap have called it a ‘halfway house’ of sorts, serving only a niche group of consumers and the governing bodies which have enacted it. It could be argued that the cap has distorted the market, based on the fact that when the cap was first introduced, prices fell dramatically between April 2019 and October 2020. When the price cap rose in January 2021, the cheapest market deals weren’t far off the capped rate of £1,138. These unrealistically low prices supported the agenda that customers were getting a good deal, and now that prices have soared, the price cap simply follows.

Should the cap remain in place?

Cap rates have taken customers on a rollercoaster ride — even if a household uses less energy, they’re still roped into paying the daily rate, while suppliers have created the perception that fair deals do exist. Without the cap, regulatory bodies and governments could once again be faced with the issue of tackling providers profiting excessively from bill payers. As we veer towards a crisis in cost of living, with or without a price cap in place, authorities would have to find substantial ways to cushion households from the looming rate hike.

Energy Price Cap FAQs

Should I switch suppliers before the new energy price cap rates begin?

Despite the fact that switching tends to help customers avoid price hikes and secure better deals, the nature of the market means that there’s no guarantee of savings. If you’re still keen to switch, consider how much costlier a new tariff would be than your current rates and factor in the average amount of time it takes to switch — typically, 17 days.

What happens if my current energy supplier goes bust?

Ofgem has a responsibility as a regulatory body to protect customers from unforeseen circumstances, such as in the event a provider enters liquidation. Your energy supply will not be interrupted in this occurrence.

Is the cap likely to increase again in 2022?

Industry experts are anticipating further price growth as wholesale energy costs remain high, though this is not certain. Wholesale prices depend on the market and levies on firms, and Ofgem has no control over these aspects.

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