What is the energy price cap? UK 2021 increase, rates, how it works and what the new limit is - explained

The energy price cap is reviewed by industry regulator Ofgem every six months based on a set of rules

Energy bills are set to rise for millions of households across the UK.

An increase in wholesale gas prices has put additional strain on energy companies faced with shouldering the immediate financial burden.

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Yet a rise in the energy price cap will allow companies to pass some of the financial weight on to consumers - here’s what you need to know before the rise.

What is the energy price cap?

The energy price cap is the maximum price 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, has put pressure on gas supplies.

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

It means that around 15 million households across Britain will be hit with a £178 annual hike on their energy bills as the price cap is set to increase from April.

How does the energy price cap work?

The price cap is reviewed by regulator Ofgem every six months based on a set of rules.

Experts at research agency Cornwall Insight expect that the price cap will be hiked to £1,455 for the typical household.

Cornwall Insight senior consultant Dr Craig Lowrey said: “Although the winter 2021-22 cap was a new record (£1,277 for a typical dual fuel direct debit customer), Cornwall Insight modelling indicates that – given the extent of the increases in the wholesale market and the manner in which the cap is set – this is set to be surpassed by that for summer 2022.”

He added: “We would need to see a material and sustained reduction in the wholesale market to avoid the kind of cap levels we are predicting for the period.”

When will the energy price cap rise?

The energy price cap will be raised from Friday 1 October 2021.

Standard tariffs could see an increase from £1,138 to £1,277 a year, while people with pre-payment meters could see an increase from £1,156 to £1,309 a year.

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.

The price cap is not an overall cap on how much a household can pay for its energy bills – households that use more energy will pay more.

The level is calculated based on the usage of a typical household that buys both gas and electricity.

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.

Business secretary Kwasi Kwarteng told Sky the government would not be “throwing taxpayers’ money at companies which have been, let’s face it, badly run.”

While not all firms could expect a government bailout, support could be available for larger firms but “it won’t just be a blank cheque”.

Emma Pinchbeck, chief executive of trade association Energy UK, 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.”

Ministers and industry figures have said there is no risk of the lights going out this winter, with energy supplies secure despite the rising costs.

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