What is the energy price cap and how does it work? | The Sun

MILLIONS of households will see their energy bills rise from April despite falling wholesale prices.

Chancellor Jeremy Hunt has already extended the energy price guarantee from April 2023 but at a higher cap.

It means the average household can expect their yearly bill to reach £3,000, up from £2,500 currently.

However, how much you will pay will depend on your usage – £3,000 is not the highest possible amount.

In November, Mr Hunt said: "From April, we will continue the Energy Price Guarantee for a further 12 months at a higher level of £3,000 per year for the average household.

"With prices forecast to remain elevated through next year, this will still mean an average of £500 support for every household."

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It comes after Ofgem announced its energy price cap will fall to £3,280 from £4,279.

But what is the energy price cap? We explain everything you need to know.

What is the energy price cap? 

The price cap on energy bills was introduced in January 2019 as a way to ensure that households are not ripped off by their energy suppliers.

It used to be that twice a year Ofgem set the maximum price that households on their supplier’s default tariff would have to pay for every unit of gas and electricity they used for the next six months.

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But the energy regulator announced a major shake-up last August, stating that the price cap would change every three months.

It affects roughly 22million people on default or standard tariffs offered by the country's energy providers, according to Ofgem estimations.

The cap is calculated based on the wholesale price of gas and electricity and also includes allowances for tax, charges paid to the energy networks, green levies and social payments.

Gas prices were already increasing last summer as demand bounced as countries emerged from lockdown.

But the situation was made much worse when Russia invaded Ukraine and started to restrict gas exports to Europe.

Gas prices are also decisive for electricity prices.

This is because gas is so important for the generation of electricity.

Over the last year, 42% of the UK’s electricity came from burning gas.

How much is the energy price cap?

The cap on standard variable and default tariffs is set by Ofgem.

The previous energy price cap meant that the average annual household bill was £1,971 a year.

It was supposed to hike to £3,549 a year in October.

To stop bills from spiralling, then-PM, Liz Truss, replaced the cap with the Energy Price Guarantee, which rolled out from October 1.

It froze bills at £2,500 a year on average.

It was supposed to be in place for two years, but after the fallout from the mini-Budget and concerns over rising government debt, Chancellor Jeremy Hunt said the guarantee would be extended beyond April but at a higher rate.

Right now, the current rates for duel fuel tariffs include 10p per kilowatt hour (p/kWh) for gas and 34p/kWh for electricity.

Will the price cap replace the energy price guarantee in April?

Rather than ditch the energy price guarantee, Jeremy Hunt has extended it for 12 months but at a higher rate.

There will also be no repeat of the £400 one-off payment made to households this year to keep bills down.

That means the 22 million or so households impacted by the cap are set to be £900 a year worse off.

How does the energy price cap work?

The energy price cap works by setting a limit on the maximum amount suppliers can charge for each unit of gas and electricity.

Ofgem sets a maximum daily standing charge which is what households have to pay in order to have their home connected to the National Grid.

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The energy price cap only applies to providers' standard and default tariffs.

This means if you're on a fixed-term energy deal, the cap doesn't apply to you.

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