The default tariff cap has carried a public spending factor since October 2022, Ofgem has confirmed. In a discussion paper published on 25 March 2024, the regulator set out that the cap's statutory factors now include "the need to set the cap at a level that takes account of the impact of the cap on public spending"1.
The change came through the Energy Prices Act 2022, which amended the Domestic Electricity and Gas (Tariff Cap) Act 2018 so that the cap could act as the reference price for the Energy Price Guarantee. The same legislation removed the requirement for an annual review and the sunset clause1. The cap itself came into effect on 1 January 2019 under the 2018 Act1.
Ofgem's paper describes the cap as having worked well in maximising consumer protection and driving down supplier costs, but states that it needs to evolve as the retail market changes. It notes that around half of households were on the cap before the energy crisis, and that this is now around 90 per cent but starting to reduce1.
"The price cap has worked well in maximising consumer protection and driving down supplier costs, but it needs to evolve as the retail market changes."
The paper also sets out the cap's structure: a standing charge and a flat unit rate, with basic adaptations for Economy 7 and other default time of use tariffs, applied for a given region and payment method1. It states that the cap is set with reference to a stringent efficiency benchmark and applied universally, so that all consumers on the cap pay the same unit rate regardless of household circumstances or consumption patterns1.
| Element of the cap | Position set out by Ofgem |
|---|---|
| Public spending factor | Added to the statutory factors from October 20221 |
| Annual review requirement | Removed by the Energy Prices Act 20221 |
| Sunset clause | Removed by the Energy Prices Act 20221 |
| Coverage | Around 90 per cent of households, down from around half before the crisis1 |
Why it matters for households
The public spending factor links the level of the cap to the cost to the Exchequer of supporting households with their bills. When the Energy Price Guarantee was in force, the government paid the difference between the guarantee level and what suppliers could otherwise charge, so the cap level and public spending were directly connected. The Energy Price Guarantee is now a closed scheme, but the factor remains part of how the energy price cap is set.
For a household, the practical effect is that the cap is no longer set only by reference to supplier costs and the efficiency benchmark. The wider cost to public funds is now one of the matters Ofgem must have regard to. The paper does not state how the factor has changed any particular cap level, and no figure for its effect on household bills has been reported.
The paper also raises the prospect of the cap's shape changing. Ofgem sets out options that move away from a flat cap, a universal cap or a stringent cap, including time of use pricing for customers who charge an electric vehicle at home, and targeting protection at groups such as those in vulnerable situations or on prepayment meters1. It states that it has not formed a view on the appropriate approach1. Any move away from a flat, universal cap would change how a home's energy independence is priced, because the rate a household pays would depend more on when and how much energy it uses.
What happens next
The discussion paper's response deadline was 10 May 20241. Ofgem states that it will publish the non-confidential responses alongside a decision on next steps1. The paper also refers to Market-wide Half-Hourly Settlement, being rolled out over 18 months from spring 2025, which Ofgem says will enable flexibility by exposing suppliers to the true costs of their customers' consumption patterns1. It notes that the Ban on Acquisition-only Tariffs was extended for up to another 12 months, and that a temporary uplift to the price cap applied from the April 2024 cap1. The price cap history records each level and announcement date.
Sources1 cited
- Future of domestic price protection, ofgem.gov.uk