Ofgem has moved the energy price cap from six-monthly calculations to every three months, according to an Energy UK explainer published on 27 October 2022. The trade body said the change means that when there is a sustained fall in the price of gas, it will be reflected sooner in people's bills1.
The explainer sets out why a fall in the spot price of gas does not feed straight through to what households pay. Suppliers hedge, buying energy in advance to lock in a price and reduce the risk of adverse price movements, and Ofgem assumes this in the cap that limits what retail suppliers can charge1. Energy UK said the spot price of gas had fallen from record highs to a level similar to around 18 months earlier, still high by historic standards, but that bills today reflect market expectations from many months and years ago1.
"This means that energy bills today reflect the market's expectations for price from many months and years ago and won't reflect today's prices."
The body attributed the fall in gas prices mainly to temporary factors: an unseasonably warm autumn, nearly full storage facilities and limited port capacity for unloading liquefied natural gas from ships1. It said that unless gas stays cheap for a long period over winter, energy prices are likely to remain much higher than normal into 20231. On electricity, Energy UK said prices are currently set by the cost of the last generating unit turned on to meet demand, mostly a gas power plant with high marginal costs, and that renewable energy is around nine times cheaper than gas1. It said the industry plans to invest £100bn over this decade in new energy sources1.
The Energy Price Guarantee was in place until March 2023 and limited the amount homes pay so that the annual bill of an average household paying by direct debit was £2,500, with the amount charged varying by usage and payment method1. Energy UK said it was working with members and government on what support would be available after March 20231. For businesses, the Energy Bill Relief Scheme gives a discount on the unit price for gas and electricity, applying to fixed contracts agreed on or after 1 December 2021 and to deemed, variable and flexible tariffs, for usage from 1 October 2022 to 31 March 20231. The explainer also cites the Industrial Energy Transformation Fund, which consists of £315 million in live grant funding for manufacturers with high energy use1.
Why it matters for households
The cap is a limit on what suppliers can charge per unit and standing charge, not a ceiling on a household's total bill, and the £2,500 figure is an average for a household paying by direct debit1. The shift to quarterly calculations shortens the gap between a sustained move in wholesale gas and electricity prices and the level at which the cap is set, but it does not remove the effect of hedging, so a short-lived dip in the spot market is unlikely to show up in what a home pays1. For a household, the practical link between world gas prices and the amount owed each month therefore remains indirect, and the pace at which any sustained fall arrives depends on how long it lasts1.
What happens next
The Energy Price Guarantee ran until March 2023, and Energy UK said discussions on support after that date were ongoing at the time of publication1. The Energy Bill Relief Scheme ran for an initial six-month period for non-domestic users, covering usage from 1 October 2022 to 31 March 20231. No further announcement on post-March household support is reported in the explainer1.