(Bloomberg) -- The cost of energy is rising for UK households, with regulator Ofgem increasing the limit on how much it allows suppliers to charge. High energy prices were a big talking point during the 2024 UK election campaign. The winner, Labour, promised to lower bills with a plan to get more energy from homegrown, renewable sources. That policy is unlikely to have much impact before 2030 at the earliest. Meanwhile, the government is facing calls from lawmakers, campaigners and the industry to review the system for pricing household energy and how it works.
What is the energy price cap?
Introduced in January 2019 by Ofgem during Theresa May’s administration, the price cap was designed to save money for consumers by setting an upper limit on how much suppliers could charge homes per unit of electricity and gas they use. It covers most households — about 24 million in the UK — who are on a so-called standard variable tariff, and caps the level of profits an energy supplier can make at about 2.5%. This offers protection for those consumers who don’t switch suppliers regularly to secure the best price available.
What doesn’t it do?
A common misconception is that the measure limits how high a household’s bill will be. But it doesn’t, since the total will depend on how much energy a home actually consumes. The cap set by Ofgem is expressed in terms of average energy bills, not an absolute ceiling. It was set to rise for a second consecutive quarter in January, with a further increase expected in April.
Has the energy price cap ever dropped?
After reaching a peak during the energy crisis, the price cap, as well as household bills, started to fall. This helped to slow broader price inflation and relieve cost-of-living pressures on households. However, the cap remains well above the level before the energy crisis sparked by Russia’s invasion of Ukraine. It’s been rising again recently as bouts of cold weather and continued strains on European supplies have left energy providers paying more for natural gas. The price cap is not expected to drop significantly in 2025.
How is the energy price cap calculated?
Price moves in wholesale markets are the most important factor. Since Russian pipeline gas stopped flowing into Europe in large quantities, the UK and other Western nations have relied more on liquefied gas shipped from further afield. This is a global market, with buyers in Asia also competing for these cargoes. That makes the gas price in the UK, and therefore household bills, more exposed to geopolitics and world markets. If wholesale rates drop, as they have in the past, the cap will drop too. While renewable sources account for a growing proportion of the UK’s electricity supply, gas remains the main driver of the overall price, and most UK homes get their heat from gas. The cap is adjusted on a quarterly basis, feeding through into an underlying price per unit of energy used which is added to a flat fee for being connected, called a standing charge.
Why is the energy price cap controversial?
It was introduced as a measure that would save consumers money. And while for a time the cap was fairly stable, or even declining, the close link to the wholesale market meant that when the energy crisis set in, rates for even the most vulnerable consumers soared. Companies and campaigners alike have called for the system to be replaced by a “social tariff” that benefits users on lower incomes and is paid for by levies on more well-off consumers.
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