Energy price cap: What is it and what will happen to bills in January?

Millions saw their energy prices fall in October after a drop in the cap, which limits how much suppliers can charge households for each unit of gas and electricity they use.

The energy regulator Ofgem sets the cap every three months. It will announce the price cap for January to March 2024 next week.

The cap confirms the maximum price suppliers can charge households per unit of energy on a standard - or default - tariff in normal circumstances. It covers 29 million households.

Under this, a typical household's annual gas and electricity bill stayed below £2,500 despite Ofgem's cap increasing above this level.

The Energy Price Guarantee finished in June 2023, and the Ofgem cap once again determines how much customers can be charged.

The regulator changed its estimate for how much gas and electricity is used by a typical household and has now recalculated the cap to £1,834.

The next quarterly price cap announcement will be on 23 November and will cover January to March 2024.

Analysts at Cornwall Insight have predicted the cap will rise by 5% to £1,931 a year from January, before starting to fall from the end of March.

Energy is regulated separately in Northern Ireland, where bills are slightly lower.

The calculations for a typical household are based on a direct debit customer using 11,500 kWh (kilowatt hours) of gas and 2,700 kWh of electricity a year.

A kilowatt hour is a unit of energy used to calculate your bill.

However, most households aren't typical.

Bills are based on how much energy you actually use, which depends on the number of people, the type of property and its energy efficiency.

In July 2023, Ofgem said around four million households had prepayment meters. Many have been in place for years, but some billpayers have been switched to prepayment meters if they struggled to pay.

Under new rules, suppliers must give customers more opportunity to clear their debts, contacting them at least 10 times before installing a meter, and they cannot be installed at all in certain households.

Image source, Getty Images

Between October and December, the typical bill for prepayment households is £1,949 (under the old usage calculations), down from £2,077, but still £26 more than for direct debit customers.

Typical bills for those who pay via cash, cheque or bank transfer, usually every three months, will be £129 more.

It is is impossible to tell for certain, not least because wholesale energy prices are affected by global issues, such as the war in Ukraine.

However, energy consultancy Cornwall Insight forecasts that prices will rise again in January 2024to £1,931, before starting to fall from the end of March.

The consultancy does not expect energy prices to return to pre-Covid levels before the end of the decade.

Lower prices should restart competition in the market, as suppliers start to offer fixed deals to customers, which set gas and electricity prices for a certain period of time.

Unlike variable tariffs, these are unaffected by the cap.

Consumer groups and regulators say this could be good for consumers, but warn that such deals do not suit all circumstances.

If variable deals continue to fall in price, anyone already locked into a fixed deal would miss out on those savings.

Those considering signing up for a fixed deal should also pay close attention to standing charges and exit fees, rather than just the headline rate.

Image source, Getty Images

Importantly, the £400 discount which all households in England, Wales and Scotland received last winter has finished.

Until the end of March 2023, businesses had their costs limited under the government's Energy Bill Relief Scheme.

Heavy energy-using sectors, like glass, ceramics and steelmakers, will get a larger discount than others.

Is the cost of your energy bills causing you to change your lifestyle? Share your experiences by emailing haveyoursay@bbc.co.uk.

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