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What is the energy price cap? How does it work, Ofgem changes 2022, rises and why household bills are going up

The energy price cap could be reviewed by industry regulator Ofgem every three months, rather than every six months, under new plans

Ofgem is looking at plans to review the energy price cap every three months.

The energy regulator for Great Britain currently updates the price cap every six months but is looking at ways to adjust more quickly to a volatile market at present.

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This would mean consumers could feel potential rises and falls in energy prices up to four times a year - in January and July, as well as April and October changes.

Plans follow the biggest jump in domestic energy bills in living memory, with a 54% increase to Ofgem’s price cap hit, and concerns over fuel poverty and cost of living rises.

Ofgem boss Jonathan Brearley has warned the energy price cap is expected to rise by more than £800 in October from £1,971 to £2,800 due to the volatile global gas market.

The war in Ukraine has also had an impact with Europe heavily dependent on Russia for its gas supply.

What is the energy price cap?

The energy price cap is the maximum guideline suppliers can charge customers on a standard or default tariff.

It was introduced in 2019 by the government to protect households from sharp fluctuations in wholesale costs, like is being experienced now.

A cold winter across Europe last year, when many spent more time inside than before due to lockdowns, had put pressure on gas supplies.

High levels of demand coupled with lower wind and solar renewable energy outage and planned maintenance work saw wholesale gas prices soar.

How does the energy price cap work?

The price cap is reviewed by regulator Ofgem.

The energy price cap was raised in October 2021 to £1,277 a year, up from £1,138.

People with pre-payment meters also saw an increase from £1,156 to £1,309 a year in their payments.

The energy price cap for those on default tariffs who pay by direct debit increased by £693 from £1,277 to £1,971 from 1 April 2022.

Prepayment customers will see a bigger jump, with their price cap going up by £708, from £1,309 to £2,017.

An increase in wholesale gas prices had put additional strain on energy companies faced with shouldering the immediate financial burden, with many going bust as a result.

Ofgem was forced to hike the energy price cap to a record high for a typical household as gas prices soared to unprecedented levels.

The price cap, which is not an overall cap on how much a household can pay for its energy bills – households that use more energy will pay more, could then be raised further in October 2022.

Customers on fixed tariffs will be unaffected in the short term until their contract comes to an end when higher deals will be on offer to compensate for the price increase.

What has been said about the rise?

Citizens Advice said around five million people would be unable to pay their energy bills from April, even accounting for the support the Government has already announced.

It warned this number would almost triple to one in four people in the UK – more than 14 million – if the price cap rises again in October based on current predictions.

Citizens Advice chief executive Dame Clare Moriarty said: “The energy price cap rise will be potentially ruinous for millions of people across the country.

“The support announced so far from the Government simply isn’t enough for those who’ll be hit hardest. With the long-anticipated price rises now hitting, many more people will face the kind of heart-rending choices that our frontline advisers already see all too often.”

Resolution Foundation senior economist Jonathan Marshall said: “Today’s energy price cap rise will see the number of households experiencing fuel stress double to five million.

“Another increase in energy bills this autumn hastens the need for more immediate support, as well as a clear, long-term strategy for improving home insulation, ramping up renewable and nuclear electricity generation, and reforming energy markets so that families’ energy bills are less dependent on global gas prices.”

How much will my energy bills go up by? (Graphic: Mark Hall / JPIMedia)

Could gas crisis affect the energy price cap?

The turbulence in gas prices could still see more energy suppliers go to the wall.

Goldman Sachs has already warned that prices in the gas market are likely to remain at twice their usual levels until 2025.

Fuel prices have also reached record highs in recent weeks amid a rise in oil prices following Russia’s invasion of Ukraine.

Emma Pinchbeck, chief executive of trade association Energy UK, had previously said the immediate concern is about helping energy companies through “a really unprecedented time”.

She told Good Morning Britain: “The immediate concern is about managing the vulnerability of our retail sector and making sure that customers are looked after through any unforeseen consequences of what is a really unprecedented time.”