Households will typically each save £151 a year on their energy bills from October, regulator Ofgem says – although gas and electricity costs are predicted to stay high for months or even years.
The Ofgem set price cap will fall in October 2023 to £1,923 a year for the average household, the energy regulator said today, down from £2,074 a year currently.
That’s a saving of £151 a year and the first time it has pushed below £2,000 since April 2022.
Here is what it means for you – including how Ofgem is rejigging the rules on how the price cap works.
Working it out: Energy bills are set to fall in five weeks, but the detail can get confusing
How energy bills will change from October 1
The Ofgem price cap sets the maximum energy firms can charge a customer on a variable-rate tariff, paying by direct debit.
Because fixed-rate deals vanished from the market, most homes are now on price-capped deals. Almost all energy firm tariffs charge customers the maximum allowed under this cap.
From now until October 1, the average household on a variable-rate tariff will pay £2,074 a year, or £172 a month, on energy, due to the Ofgem price cap.
From October 1, that typical bill will fall to £1,923 or £160.25 a month.
But exactly how much you pay will vary depending on your energy use. This is because the price cap only limits the maximum you can 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 complicate matters further, Ofgem will also change how it works out ‘average’ energy use.
Since the start of the pandemic, Ofgem has estimated that a normal home uses 2,900 kWh a year for electricity and 12,500 kWh for gas.
From 1 October 2023, those figures will fall to 2,700 kWh and 11,500 kWh, respectively, as Ofgem says the typical home uses less power than it first thought.
Because Ofgem thinks we will use less power, the typical average bill is set to fall further than it would otherwise.
The price cap changes four times a year. After October 2023 the next change will be in January 2024.
Homes that use more than £3,000 a year in energy will have their bills capped at this level due to the Government’s Energy Price Guarantee.
This is a Government scheme that sees the state pick up some of the tab for consumer gas and electricity bills.
It was launched at the level of £2,500 in October 2022, and was raised to £3,000 in July 2023.
What is the future of the price cap?
Ofgem does not make predictions about how the price cap will change, but analysts at Cornwall Insight do. The firm has predicted all previous price cap movements fairly accurately.
Worked out using Ofgem’s current energy use assumptions, Cornwall Insight predicts average energy bills will rise to £2,082 in January 2024, fall to £2,014 in April then fall further to £1,965 next October.
Using the new assumptions, typical energy bills will fall to £1,823 in October 2023, then rise to £1,979 in January, drop to £1,915 in April and then fall to £1,867 in October 2024 – if Cornwall Insight’s predictions are correct.
But the existence of the price cap itself is in question – at least, in its current form.
The price cap has come under fire from several critics, including Ofgem itself.
Earlier this month Ofgem chief executive Jonathan Brearley said the price cap should be shaken up, saying it was ‘broad and crude’ and might not work well for consumers.
Because most households now pay price-capped bills, they have little incentive to swap to another provider, as they would end up paying the same.
A spokesperson for the Department for Energy Security and Net Zero said: ‘The Government will always ensure the energy market is working for consumers to protect them from sky high bills and that households are getting the best deal.
‘Our consultation on how best to ensure people can access the full benefits of moving to a smarter, more flexible energy system is ongoing.’
Where are all the cheaper energy deals?
Historically, the cheapest energy deals have been fixed-rate tariffs, with variable-rate deals normally reserved for households that had reached the end of their cheap tariff and not switched to a new one.
But energy firms all pulled these low-cost fixed deals when energy prices started rising in October 2021, leaving consumers with no choice but variable rates.
Without cheap fixed-rate energy deals, customers are at the mercy of bills dictated by the Ofgem price cap.
Energy firms have slowly started to bring back fixed-rate deals, but most are not much cheaper than customers are paying on the price cap.
Cornwall Insight has said energy prices might not go back to normal until the end of the decade.
Elsewhere, energy experts at Auxilione think energy bills will not drop below £1,000 a year for the forseeable.
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