Ofgem price cap explained: What is it and why are energy bills getting more expensive?

The Ofgem price cap is important as it sets the rate a limit on what suppliers can charge for each unit of gas and electricity you use - here is everything you need to know about it

Ofgem's October price cap has come into force today - and households are set for a hard winter as bills are now more expensive.

From today, Ofgem's price cap rose by £149 going from £1,568 to £1,717 for the typical person paying by direct debit. The energy regulator says the 10% rise will equate to an extra £12 on the average monthly bill. Ofgem's price cap has made headlines over the last few years as the energy crisis has worn on.

However, even with this many Brits are not aware of Ofgem and how its price cap impacts their day to day life. Here we explain everything you need to know, including what Ofgem's price cap actually is, how it gets decided, and how it will impact you now and going forward.

What is Ofgem's price cap?

The price cap sets the maximum rate energy firms can charge per kilowatt (kWh) hour for gas and electricity you use, along with standing charges. Standing charges are what you have to pay no matter how much energy you use. Its name can be confusing as it is not actually a cap on overall bills - just on the rates of gas and electricity. This means the more you use, the more expensive your bill could be.

The headline figure is what a direct debit customer with "typical energy consumption" can expect to pay each year based on wholesale energy prices. Ofgem's calculations are based on the average household consuming 2,700 kilowatt hours (kWh) of electricity and 11,500 kWh of gas over 12 months.

The price cap is also slightly different if you're a prepayment customer, or if you pay on receipt of bill. There are also slight regional variations in terms of the rates you're charged under the price cap, with headline numbers used to give an average across the UK. The cap only applies to standard variable or default tariffs - so if you're not on a fixed rate deal. If you are on a fix tariff, then you will not be impacted by the change today.

How does the price cap get decided?

The price cap was first introduced in January 2019 by the Theresa May Government to prevent energy firms from overcharging customers. The rate is based on wholesale prices along with other elements such as the cost of maintaining the pipes and wires that carry gas and electricity, and the operating costs suppliers face. Other costs include network, operating and policy costs and VAT.

Ofgem updates its price cap every three months - in January, April, July and October. The assessment period for wholesale energy prices for the new October price cap was from May 17, 2024, to August 16, 2024. The next announcement will come on November 25 and that will cover the period from January 2025 until March.

Why have energy prices gone up?

Prices for wholesale energy first started to rise in 2021 off the back of Covid-19. Ofgem's price cap - which sat at £1,216 in October 2021 - prevented energy firms from passing on the higher costs. This saw nearly 30 suppliers collapse.

Prices continued to rise throughout 2022, when Russia invaded Ukraine and the price cap looked set to rise to an "unaffordable" level for households of over £4,000. The Government was then forced to step in and introduce the Energy Price Guarantee, which set energy costs at £2,500 a year for direct debit customers. The Energy Price Guarantee replaced the Ofgem price cap from October 2022 until July 2023.

The conflict between Russia and Ukraine caused prices to rise, and most recently pressure has mounted once again due to the conflict between Israel and the Governing body of the Palestinian territory of Gaza, Hamas. This continues to be an issue as the conflict spreads further through the middle east.

Will energy bill prices come down?

Yesterday, the energy analysts at Cornwall Insight published its latest prediction for Ofgem's January price cap. The group - which has accurately predicted price cap movements in recent years - say that Ofgem's price cap could come down in January.

This is welcome news and predictions have previously put the cap as rising again in the New Year. According to Cornwall Insight, will drop from October's rate of £1,717 to £1,697 on January 1 - a drop of £20. Gas and electricity prices could continue to fall until at least September 2025, Cornwall Insight thinks.

However, this is considered "crystal ball" territory as a whole array of factors could impact wholesale prices in the next 12 months. However, yearly energy bills will still be hundreds of pounds more expensive than they were before the energy crisis began in late 2021.