What is the energy price cap? UK energy price cap 2022 rise and how the energy price cap works


What is the energy price cap? UK Energy price cap 2022 price and how the energy price cap works (Image credit: Nick Ansell/PA Wire)

After energy bills soared to record highs in 2021, the energy price cap will rise even higher in 2022.

Ofgem announced on Thursday February 3 that the energy price cap will rise by more than 50% from April, as UK households face even higher gas and electricity bill costs.

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The energy price cap’s 2022 rise comes amid an overall increase in the cost of living in the UK – with Prime Minister Boris Johnson urged to take further measures against rising inflation and an expected increase in interest rates.

But what is the energy price cap? And how does it work?

Here’s everything you need to know about the UK’s energy price cap, how it works and how much bills will likely increase by in April 2022.

What is the energy price cap?

Introduced by the UK Government in 2019 and regulated by energy regulator Ofgem, the energy price cap places a limit on how much suppliers can charge UK households on default tariffs.

The price cap regulates the cost of energy units and is supposed to ensure that customers do not pay excessive amounts for their gas or electricity – or are not vulnerable to competitive behavior of dominant market players.

It is reviewed by regulator Ofgem every six months based on a set of rules.

It was announced in August 2021 that rising wholesale gas and electricity prices would lead to an increase in the energy price cap from October 1.

The energy price cap hike saw an estimated £139 a year added to household energy bills, with typical gas and electricity customers in the UK paying up to £1,277 since October.

In line with rising wholesale gas and electricity costs currently being felt worldwide, stressed further by heightened geopolitical tensions with Russia, energy bills are set to rise even higher in April 2022 as Ofgem is to announce the results of its energy price cap review on Thursday February 3.

How does the energy price cap work?

The energy price cap is reviewed by Ofgem every six months in accordance with changing wholesale prices in the energy market.

It is used to place a limit on how much suppliers of gas and electricity can charge customers for every unit they use.

It sets a limit on the maximum amount suppliers can charge you for daily standing charges – which are the cumulative prices you pay for your home to receive energy from the national grid.

The cap itself is calculated according to the prices of wholesale gas and electricity, in addition to operating costs for suppliers and taxation.

How much is the energy price cap 2022?

Ofgem revealed on Thursday (February 3) that the UK energy price cap will rise by 54% and £693 to £1,971 per year due to soaring wholesale gas and electricity prices.

Experts previously warned in 2021 that rising energy costs could possibly see a 14% price cap hike from April 2022.

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 modeling 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.”

Given that wholesale energy market prices have only increased in the months since the previous energy cap rise, experts’ fears over even bigger price hikes now appear to be confirmed.

Will my energy bills go up?

If you pay your energy bills on either a standard variable tariff or default energy tariff, the energy price cap will have an impact on your bills and energy costs.

For instance, those on British Gas’ Standard, Standard PAYG, Standard Variable, Safeguard, PAYG Safeguard, Safeguard PAYGv2, FlexiPAYG Mar 2023, Welcome to British Gas and The Peoples Tariff tariffs are subject to the price cap.

Households on fixed rate tariffs with their energy supplier are not affected by the price cap.

The energy price cap itself doesn’t limit how much you will pay for your bills as it applies to unit rates and suppliers, so you could find yourself paying more than the energy price cap amount in 2022 if you have a larger home or use more energy.

But given the expected increase of up to 50% on the current price cap, millions of households across the UK are likely to see their bills rise.

This is because many energy suppliers could be expected to reflect the energy price cap rise with increases to standard and default tariff costs.

According to the Times, Chancellor Rishi Sunak will commit to giving households in council tax bands A to C rebates funded by Government grants under targeted measures for poorer households.

Additional reporting by PA

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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