The Energy Price Cap: How the Default Tariff Cap Is Set

The energy price cap is a limit on what a supplier can charge for each unit of gas and electricity, and on the daily standing charge. It is not a limit on your total bill. Ofgem, the regulator for Great Britain, sets maximum prices for a unit of energy and daily standing charges for customers in each energy supply region, with separate caps for gas and electricity¹. The cap does not limit annual bills, which depend on how much energy a household uses¹.

This distinction matters more than any other fact about the cap. As Ofgem's own guidance puts it: "It does not limit the cost of your total bill. The more energy you use, the higher your bill will be."² The cap has been in force since it came into effect at the beginning of 2019¹, and it is revised each quarter¹. Around 28 million customers in Great Britain were covered as of July 2024¹.

A limit on unit rates and standing charges, not on the bill

The cap limits how much suppliers can charge per unit of gas or electricity, based on the underlying costs of serving a customer⁴. The limit is not on the total bill, which varies with the number of units used in a billing period⁴. When the cap was introduced, Ofgem described it plainly: "The price caps are a cap on a unit of gas and electricity, with standing charges taken into account. They are not a cap on customers' overall energy bills."⁵

In practice, the cap sets the maximum amount a supplier can charge for a unit of energy and the standing charge together². A household that uses a lot of energy pays more than one that uses little, even though both are charged at or below the same capped rates. The cap is therefore a ceiling on prices, not a guarantee of what any household will pay, and the headline figure Ofgem publishes each quarter, the "typical" annual bill, is only an illustration based on assumed typical consumption of 2,500 kWh for electricity and 9,500 kWh for gas⁶.

Who the cap protects: standard variable and default tariffs

The cap protects people on tariffs where the unit rate can go up or down depending on the energy market². These are called standard variable tariffs². People on this type of tariff are protected by the energy price cap⁷, and the same protection extends to the wider group of "default tariffs", which Ofgem and the government use as a collective term for standard variable and default tariffs⁸.

The scale of this protection is large and has grown over time. Ofgem's operating cost decision of May 2025 records that the cap, introduced on 1 January 2019, protects 22 million default tariff and standard variable tariff customers⁹. A consultation a year earlier put the figure at 29 million customers¹⁰, and a 2022 decision on the Contracts for Difference allowance put it at 23 million households¹¹. The differences reflect the timing of each document and the churn between fixed and variable tariffs as wholesale prices moved.

Coverage does not depend on how a household pays. Ofgem states that a customer is covered by the cap if they are on a default tariff and pay by standard credit, Direct Debit, prepayment meter or Economy 7 meter³. The Welsh Government's guidance makes the same point: the cap applies to default tariffs regardless of whether bills are paid by Direct Debit or prepayment¹². Even a household placed on a deemed contract, the temporary tariff a new supplier assigns after a supplier fails, remains covered by the cap¹³. In 2022 Ofgem noted that the cap ensured 22 million households, including the 4 million who use a prepayment meter, paid a fair price for their energy¹⁴.

Exemptions from the cap: fixed tariffs, firms, heat networks and oil

The cap applies where a customer has not signed up for a fixed-term contract with their supplier¹. If a household has chosen a fixed tariff, its prices are not protected by the cap². Ofgem's own guidance from the cap's early years states this directly: "Your prices will not be protected by the caps if you have chosen to be on a fixed-term energy tariff."¹⁵

Several groups sit outside the cap altogether:

• Fixed-term tariffs chosen by the customer¹⁵
• Business energy customers, who are not protected by the price cap¹⁶
• Heat networks and district heating, classed as commercial supplies and not covered by the cap¹⁷
• Heating oil, which is not regulated by Ofgem and not covered by the cap¹⁹

The heat network exclusion is significant because heat is distributed to surrounding homes from a central source, and the House of Commons has confirmed that energy provided through district heating systems falls outside the cap's scope¹⁸. Edinburgh's local heat and energy efficiency strategy records the same position for schemes in that city¹⁷.

For heating oil, the exclusion has real consequences. Trading Standards reported in March 2026 that heating oil is not covered by Ofgem's energy price cap, "leaving consumers fully exposed to sudden market increases"²⁰. A household on oil, LPG or a heat network therefore has no price ceiling at all, whatever its supplier charges is what it pays.

One further boundary is historical but worth knowing. In September 2022 the government announced the Energy Price Guarantee, which superseded the existing energy price cap for a period²¹. That guarantee has since ended and the cap operates again, but the episode shows that the cap's level is a policy choice that government can override.

The quarterly process behind Ofgem's cap level

Ofgem reviews and sets a level for how much an energy supplier can charge for each unit of energy and the daily standing charge every three months³. The cap was originally reset every six months, but in summer 2022 Ofgem moved to quarterly setting in response to high and volatile wholesale prices²². The regulator revises the cap each quarter¹.

The method is built on a forward view of the market. Ofgem set up the cap to calculate the wholesale index based on a 12 month forward view of gas and electricity prices²². The wholesale costs review that underpins this method drew on data collected from 11 suppliers representing 96% of the retail market⁸. Changes to the methodology itself are made more slowly: when Ofgem consulted on changes to the wholesale cost methodology in December 2023, it stated that any changes would, at the very earliest, be made as part of the update for the July to September 2024 cap period⁸.

The quarterly rhythm means the cap tracks the market with a lag. Rapid increases in wholesale energy prices from mid-2021 onwards led to a 54% increase in the cap in April 2022⁶, and the Q4 2022 cap reached £3,371⁶. When wholesale costs fall, the cap falls too, as it did when Ofgem confirmed a 7% fall for 1 April to June 2026¹².

The components that make up the cap

The cap is a bundle of cost allowances, each estimated by Ofgem. The components are wholesale costs, network costs, policy costs, operating costs, an allowance for earnings before interest and tax (EBIT), headroom, a levelisation allowance, and VAT at 5% on gas².

• Wholesale costs: the cost of buying energy on the open market²
• Network costs: the cost of transporting energy to a home²
• Policy costs: the costs of government schemes and essential support³
• Operating costs: the supplier's cost of running its business²
• EBIT: the profit margin an efficient supplier is allowed to earn²³
• Headroom and levelisation: allowances for uncertainty and for making sure prepayment and Direct Debit customers pay the same standing charge²

Wholesale costs are the largest component and the most volatile, which is why the cap moves with the market. Network costs are the next most important component, making up around one quarter of the total¹. Policy costs are the government's lever: the government cut these in April 2026 by ending a levy-funded energy efficiency scheme and shifting the largest renewable generation support scheme to general taxation¹.

The EBIT allowance exists because the cap's purpose is not to eliminate supplier profit but to ensure customers pay no more than is necessary for an efficient supplier to recover its costs and earn a reasonable level of profit²³. Ofgem has amended the methodology for setting this allowance over time²³. One technical point on the published tables: the cap level documents state that all values are exclusive of VAT, which is applied by suppliers to consumers' bills²⁴.

How you pay affects the cap level

Ofgem sets different cap levels for each payment method, because the costs of serving customers differ. For 1 October to 31 December 2025, the totals for a typical dual-fuel household were²⁵:

The £1,755 figure is the one Ofgem quotes for a typical household using electricity and gas and paying by Direct Debit across England, Scotland and Wales³. For that typical household, bills increased by £2.93 a month, or £35.14 a year, under the October 2025 cap³.

Standard credit is the most expensive way to pay. Around 16% of customers pay this way, and Ofgem reports that many, up to 43% according to its research, do not realise this is the most expensive way to pay for energy²⁶. The premium is substantial: Ofgem's debt strategy update of November 2025 identifies a £135 price premium on standard credit specifically due to the costs of debt²⁶. Standard credit also becomes the default payment method where a Direct Debit fails, or where prepayment is not an appropriate way for a customer to pay²⁶.

Prepayment customers pay the least of the three, and the levelisation allowance exists to make sure prepayment and Direct Debit customers pay the same standing charge². Ofgem has also reviewed historical debt-related costs within the cap, a review that bears directly on the gap between payment methods⁹.

Standing charges: the unavoidable daily cost

Standing charges are a daily charge that energy customers have to pay even if they use no energy²⁷. Ofgem's guidance is blunt about the definition: "The standing charge is a fee you pay each day, even if you do not use any energy on that day."²⁸

The charge is used to recover the costs required to provide energy company services, including providing and maintaining the wires, pipes and cables that deliver power to a customer's door, through to the staff and buildings required for the energy business to function²⁷. It is not a charge a household can decline while remaining supplied.

Standing charges have been rising. For the October to December 2025 cap, Ofgem announced that standing charges would rise by 4% for electricity and 14% for gas²⁹. One driver is policy: the expansion of the Warm Home Discount added a total of 7p per day to standing charges²⁹. Earlier, for the April 2025 cap, Ofgem warned that some households would see a small increase in standing charges of up to £20 per year for a typical dual fuel consumer³⁰.

For a household trying to cut its bills, the standing charge sets a floor. Using less energy shrinks the unit-rate part of the bill, but the daily charge accrues regardless. A home that halved its consumption would not halve its bill.

Why fourteen regions get fourteen different figures

A separate price cap is set for each of the 14 regions and applies throughout the region, with no breakdown below regional level¹. The cap sets maximum prices for customers in each energy supply region of Great Britain¹. There is no single national unit rate.

The differences are not trivial. For 1 October to 31 December 2025, the electricity cap for a single-rate meter customer paying by other payment methods, at 3,100 kWh a year, was £916.85 in London against £936.78 in the Southern region, and the annual cost at nil consumption, which is effectively the standing charge, was £160.10 in London against £155.12 in Southern²⁴.

The pattern persists in the most recent cap period. For 1 July to 30 September 2026, the electricity standing charge benchmark ranged from £172.77 in the Southern region to £223.48 in the Northern region, with the Southern Western region at £201.24 and the Midlands at £207.57³¹. The main driver is network costs, which differ by region because the cost of maintaining the wires and pipes that serve each area differs¹.

Regional variation also interacts with policy costs. Ofgem noted increases to parts of the costs of transporting energy in Great Britain, England, Scotland and Wales, in the October 2025 cap³. A household cannot choose its region, so this is one part of the bill that no amount of supplier switching can change.

Fixed tariffs versus the cap: weighing the options

The cap protects people on standard variable tariffs, where the unit rate can go up or down depending on the energy market². A fixed tariff removes that variability: the rate is locked for the term of the deal, but the household leaves the cap's protection, because the cap applies only where a customer has not signed up for a fixed-term contract¹.

Neither option is automatically cheaper. The cap is a ceiling, not a price, and suppliers are free to charge below it. When wholesale prices are falling, fixed deals are frequently priced below the capped variable rate, and Ofgem's own confirmation that the cap would fall by 7% for 1 April to June 2026, with estimates suggesting it would stay roughly the same until the end of the year, illustrates how the variable rate moves with the market¹². When wholesale prices rise, the capped variable rate rises with them at each quarterly review, while a fixed deal holds.

The October 2025 cap gives a sense of the scale of quarterly movement: Ofgem described it as a rise of 2%, with a typical household on a default tariff paying £102 for what previously cost £100 per month²⁹. The same announcement noted an electricity balancing cost adding around £1.23 a month to the average household bill²⁹. A household weighing a fixed deal against the cap is weighing certainty against the possibility that the cap falls further.

The cap and homes that generate their own power

The price cap is a protection for households that depend on a supplier for all their energy. It limits what that supplier can charge per unit and per day, but it does nothing to reduce the underlying dependence: the household still buys every kWh from the market, still pays the standing charge for the network that delivers it, and still absorbs every policy cost the government loads onto bills.

For a household generating its own electricity, the calculus changes. Every kWh produced on site is a kWh not bought at the capped rate, and the unit-rate part of the bill falls directly with consumption. The standing charge, however, remains: it accrues every day for as long as the home is connected, and Ofgem's guidance is clear that it is paid even by a household that uses no energy²⁸. A grid-connected home with solar panels or a heat pump therefore reduces its exposure to the cap's most volatile component, the wholesale-driven unit rate, while keeping its exposure to the fixed daily charge and to regional network costs it cannot influence.

Households off the gas grid face a starker position. Heating oil is not covered by the cap, leaving consumers fully exposed to sudden market increases²⁰, and business energy customers and heat network customers have no cap protection either¹⁶. For these homes, the cap offers nothing, and self-sufficiency measures are the only buffer against market prices. The cap, in short, is a floor under the price of dependence, not a substitute for reducing it.