What is the energy price cap and why could it surge to £2,800?

The cost-of-living crisis is expected to worsen dramatically in October after the head of energy regulator Ofgem warned its price cap is set to jump to around £2,800.

It would represent a sharp increase from the current cap for the average household from £1,971 for those on default tariffs paying by direct debit.

This itself was only introduced in April after a 54% jump, or £693 a year, due to rapidly rising wholesale energy costs.

Jonathan Brearley, chief executive of the watchdog, told MPs on Tuesday that it is a “very distressing time for customers”.

Here the PA news agency looks at what the price cap is and why prices are set to rise further for customers.

– What is the energy price cap?

Ofgem, which originally stood for the Office of Gas and Electricity Markets, is the independent regulator of the British energy market and is designed to ensure customers are protected as much as possible.

Therefore, a key part of its role is to set a limit – the price cap – on what energy firms charge customers on default, or standard variable, tariffs.

Variable tariffs have previously been more expensive than fixed-rate deals and people are often on these tariffs if they have never switched suppliers, a fixed term has ended or their supplier has gone bust.

Some 23 million households have their domestic energy bill governed by the price cap.

There is also a separate price cap for customers on prepayment meters.

On a standard energy bill, the price cap will govern the maximum standing charge and price per kWh of gas and electricity that your supplier can charge you.

– How and when could it change?

The price cap was introduced in 2019 and designed to change twice a year.

It would change in April, to cover the summer months when people tend to use less energy, and again in October before an expected increase in usage.

The next change will take place in October, when Ofgem suggested it is likely to soar to “the region of £2,800” for an average household.

However, Ofgem also announced last week that prices could soon be reviewed quarterly rather than every six months.

The plans, which are under consultation, would mean prices could change again in January.

– How is it calculated?

Ofgem bases the price cap on how much it would cost a typical energy supplier to provide energy for an average home.

It uses a raft of factors which impact upon energy bills in its calculations, as well as considering usage levels and market data across a given period.

Wholesale gas and electricity costs for suppliers and the network costs they have to pay, such as infrastructure, are key factors.

Ofgem also considers the operating costs and profit margin of suppliers.

Environmental obligations and taxes can also be considered as part of the price cap figures.

– Why are energy prices increasing?

The recent surge in energy prices has been driven by wholesale prices, specifically the soaring cost of gas.

Gas prices on global markets have surged by as much as six-fold having leapt higher before the invasion of Ukraine.

Last year, countries in Asia and Europe used significant amounts of gas stocks during a long winter which helped to drive up prices while the reopening of economies also sparked higher energy usage.

More recently, the invasion of Ukraine by Russia has led to a restriction of Russian gas which has in turn pushed prices higher.

In the UK, very little gas is sourced from Russia but this has not shielded suppliers from the pricing impact across the rest of Europe, which typically sourced around 40% of natural gas from Russia.

– What can customers do if they are worried about their rising energy bills?

Ofgem suggests contacting your supplier as soon as you can if you are worried about paying your energy bills or are in debt to your supplier.

Suppliers must work with you to agree on a payment plan customers can afford under Ofgem rules.

People can ask for more time to pay, access to hardship funds and payment breaks or reductions, under the potential options.

Some energy companies offer certain schemes, for example, if someone is making their home more energy-efficient or offering free boiler checks and upgrades.

Some people may also qualify for particular forms of help such as Winter Fuel Payments or the Warm Home Discount Scheme. Some charities may be able to offer grants.