How does the energy price cap work? Ofgem set to review cap

The energy regulator Ofgem has announced that it will conduct a consultation on the energy price cap in the face of pressure from energy companies to lift them.

With gas wholesale prices soaring, UK households are facing staggering increases in their energy bills this winter – and the price cap has already been raised twice this year, once in April and again in October.

However, 13 UK utilities have gone bankrupt since September, with Bulb Energy – which has 1.7 million customers – reportedly at risk of catching up.

READ MORE: Does the Energy Price Cap Affect Businesses?

When was the energy price cap introduced?

The energy price cap was first introduced in January 2019 to offer normal customers some protection from rising energy bills.

But since the summer, the rising demand for energy has driven up gas prices on the wholesale market in recent months.

A combination of a severely deregulated energy market and a lack of gas storage capacity has made the UK particularly vulnerable to sudden increases in wholesale prices.

The Rough facility in the North Sea, which provided 70% of UK gas storage capacity for over 30 years, closed in 2017 after the UK government decided not to subsidize its maintenance.

How does the energy price cap work?

Ofgem, the industry regulator, sets the price cap so that suppliers cannot bill their customers more than a certain level per kilowatt hour for each unit of electricity and gas.

This limits customer bills and ensures that any increases in energy tariffs are kept within certain limits, which offers some protection for normal households.

Lately, however, utilities have been pushing for the cap to either be lifted again or to be abolished altogether.

Last week, Scottish Power CEO Keith Anderson said the energy price cap should be removed, suggesting that the fixation on encouraging more competition in the industry had been counterproductive.

How high is the electricity price cap?

As of October 1st, the energy price cap on household bills is £ 1,277 per year.

This was an increase of £ 139 from April this year when the cap rose by £ 96 to £ 1,138. Analysts warn that it could rise another 30% in April next year.

For prepaid plans, the cap increases by £ 153 to £ 1,309 per year.

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