How does the energy price cap work? What Ofgem's price cap means for you as bills soar

With wholesale gas prices soaring, millions of UK households are braced for another eye-watering increase in their energy bills.

Energy industry regulator Ofgem has an energy price cap, which is supposed to provide ordinary consumers with some protection against sudden hikes in their bills – but many people have been left wondering just what it does for them.

So how exactly does the energy price cap work?

READ MORE: Energy prices: why they’re rising, how much they’ll increase in April – and what Martin Lewis says about fixing prices

What is the energy price cap?

The energy price cap is the maximum amount which UK energy suppliers can charge domestic consumers for their default tariff.

It is intended to provide something of a safeguard for households against sudden and sharp increases in their energy bills.

Energy industry watchdog Ofgem regularly reviews the energy price cap and sets it at what it determines to be an appropriate level.

How does the energy price cap work?

Ofgem’s energy price cap imposes a limit on energy suppliers’ default tariff, restricting what they can charge per unit.

It also sets a maximum daily standing charge, which keeps your home connected to the energy grid.

However, the energy price cap does not impose an upper limit to your total bill – so how high that is will still depend on how much energy you use. Also, the cap does not apply if you’re on a fixed-term energy deal.

When setting the energy price cap, Ofgem takes energy market costs into account – so if wholesale energy costs go up, your household bill is likely to follow suit.

There are other factors that may also affect how much you pay, including the method of payment – direct debit, prepayment, or standard credit – and where you live.

When is the energy price cap reviewed?

Ofgem reviews its energy price cap twice a year – once in February and again in August.

Any changes made to the energy price cap following these reviews come into effect from April 1st and October 1st respectively.

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