Ofgem energy price cap set to fall to £1,923 a year from October 2023

Households will typically save £151 a year on their energy bills from October, says regulator Ofgem, although gas and electricity costs are predicted to remain high for months, if not years.

The price cap set by Ofgem will drop to £1,923 a year for the average household by October 2023, the energy regulator said today, from £2,074 a year currently.

That’s a saving of £151 a year and the first time since April 2022 it’s fallen below £2,000.

Here’s what it means for you, including how Ofgem adjusts the rules on how the price cap works.

How the energy bill changes from October 1

Ofgem’s price cap sets the maximum that energy companies can charge a customer a variable rate, where payment is made by direct debit.

As fixed-rate offers have disappeared from the market, most homes now have capped-price offers. Nearly all energy company rates charge customers the maximum allowed under this cap.

From now until October 1, the average variable rate household will pay £2,074 a year, or £172 a month, in energy, due to Ofgem’s price cap.

From October 1, that typical bill will drop to £1,923 or £160.25 per month.

Ofgem said this is because of the falling price of wholesale energy, which companies like British Gas buy and then resell to consumers.

But exactly how much you pay depends on your energy consumption. This is because the price cap only limits the maximum you may be charged for the units of gas or electricity you consume. The more units you use, the more you pay, and vice versa.

How much you pay also depends on your standing charge, which varies depending on factors such as where you live in the country.

To further complicate matters, Ofgem will also be changing the way it calculates ‘average’ energy use.

Since the start of the pandemic, Ofgem estimates that a normal house uses 2,900 kWh of electricity and 12,500 kWh of gas annually.

From October 1, 2023, those numbers will drop to 2,700 kWh and 11,500 kWh, respectively, as an average home consumes less power than originally thought, according to Ofgem.

As Ofgem believes we will be using less power, the typical average bill will drop further than it would otherwise.

The price cap changes four times a year. After October 2023, the next change will be in January 2024.

For homes using more than £3,000 a year in energy, the bill is capped at this level due to the government’s Energy Price Guarantee.

This is a government scheme where the state takes on a portion of the bills for consumers’ gas and electricity bills.

It launched at the £2,500 level in October 2022 and was increased to £3,000 in July 2023.

What is the future of the price cap?

Ofgem doesn’t make predictions about how the price cap will change, but Cornwall Insight analysts do. The company has predicted all previous price cap movements with reasonable accuracy.

Based on Ofgem’s current energy consumption assumptions, Cornwall Insight predicts that the average energy bill will rise to £2,082 in January 2024, fall to £2,014 in April and then fall further to £1,965 in October next year.

Based on the new assumptions, average utility bills will fall to £1,823 in October 2023, then rise to £1,979 in January, fall to £1,915 in April and then fall to £1,867 in October 2024 – if Cornwall Insight’s predictions are correct.

However, Ofgem has warned that energy prices are likely to remain high through winter 2023.

Ofgem chief executive Jonathan Brearley said: ‘It is welcome news that the price cap continues to fall, but we know that people are struggling with the wider cost of living challenges and I cannot offer any assurance that things will ease this winter .’

But the existence of the price cap itself is up for debate – at least in its current form.

The price cap has come under fire from several critics, including Ofgem itself.

Earlier this month, Jonathan Brearley, CEO of Ofgem, said the price cap needs to be shaken up as it would be “broad and crude” and may not work well for consumers.

Since most households now pay capped bills, they have little incentive to switch providers, as they would end up paying the same.

A spokesman for the Department for Energy Security and Net Zero said: ‘The government will always ensure that the energy market works for consumers to protect them from skyrocketing bills and that households get the best deal.

“Our consultation on how best to ensure people can access all the benefits of moving to a smarter, more flexible energy system is ongoing.”

Where are all the cheaper energy deals?

Historically, the cheapest energy deals were fixed rates, while variable rate deals were normally reserved for households that had reached the end of their cheap rate and had not switched to a new rate.

But energy companies all made these cheap fixed deals when energy prices started to rise in October 2021, leaving consumers with no choice but variable rates.

Without cheap fixed rate energy deals, customers are at the mercy of the bills dictated by the Ofgem price cap.

Energy companies have slowly begun to bring back fixed-rate deals, but most of them aren’t much cheaper than customers pay before the price cap.

For this reason, Ofgem today called on consumers to be wary when entering into a fixed rate deal.

Ofgem’s Brearley said: ‘Anyone considering a repair should weigh all the facts and consider what matters most to them, whether that be the lowest price or the certainty of knowing exactly what they will pay each month. It is important that customers compare firm deals to the new, lower price cap announced today.”

Cornwall Insight has predicted that energy prices will not return to normal until the end of this decade.

Elsewhere, Auxilione energy experts don’t think energy bills will fall below £1,000 a year for the foreseeable future.