This is why a drop in the energy price cap won’t mean cheaper bills right now

Households across the country are paying more than ever before for the energy they use. Since the start of the energy crisis, families have been worried about how much their energy bills will cost and how they will make ends meet. 

The government introduced the Energy Price Guarantee in October 2022, which effectively overrides the energy price cap, and aims to protect households from the huge price hikes we saw throughout 2022. 

While the price cap hit £4,279 - its highest level ever - in January 2023, the Price Guarantee caps typical annual bills at £2,500, and the government makes up the difference. But from April, the Price Guarantee will rise to an average £3,000 per year, while Ofgem’s price cap is due to reduce to £3,280. 

Why is the Energy Price Guarantee going up if the cap is coming down?

Since the Energy Price Guarantee was introduced in October 2022, we have been paying significantly less than the energy price cap for our energy. For example, from October 2022 to December 2022, the energy price cap was set at £3,549. It then rose to £4,279 for January 2023 to March 2023. This is significantly more than the £2,500 level set by the government under the Energy Price Guarantee. 

The government has been spending huge amounts of money to cover the shortfall between what households pay for their energy and the price that our suppliers pay to buy the energy from the wholesalers. 

The reduction in the energy price cap, from £4,279 to £3,280 reflects a drop in wholesale prices, but £3,280 is still more than the increased price guarantee that is due to come into force in April. 

This means that the government will be spending less money to make up the difference between what we pay as consumers and what the energy suppliers pay to buy the energy they sell to us. But it will still be spending money to make up the shortfall. 

CEO of the energy regulator Ofgem, Jonathan Brearley, says: “This announcement reflects the fundamental shift in the cost of wholesale energy for the first time since the gas crisis began, and while it won’t make an immediate difference to consumers, it’s a sign that some of the immense pressure we’ve seen in the energy markets over the last 18 months may be starting to ease.

“If the reduction in wholesale prices we’re currently seeing continues, the signs are positive that the price cap will fall again in the summer, potentially bringing bills significantly lower.

“However, prices are unlikely to fall back to the level we saw before the energy crisis. Even with the extensive package of government support that is currently in place, this is a very tough time for many households across Britain.”

What's the difference between the energy price cap and the Energy Price Guarantee?

The energy price cap is set by the energy regulator Ofgem and has been in place since 2019. It reflects the changing cost of wholesale energy, so since the energy crisis, it has drastically gone up. It's reviewed by Ofgem every three months. 

The Energy Price Guarantee was introduced by the government in October 2022 after the energy price cap was predicted to rise by another 80%. This would have made energy bills impossible to afford for millions of families. The price guarantee effectively freezes average energy bills based on typical use, at a level set by the government for two years. After than point, energy prices are expected to have stabilised and the price guarantee will end, and prices will be based on the energy price cap again.

When will I see my energy bills come down?

If wholesale energy prices continue to drop as predicted, then from the summer, the energy price cap could drop to less than the £3,000 price guarantee. While the government has not yet announced whether the price guarantee will be reduced if this happens, it could mean that suppliers are able to offer fixed rate deals again, and you could be able to lower your bills by switching to a different provider. 

But while the situation remains uncertain at this point, we could see energy prices drop later this year. While prices will likely still be more than before the energy crisis hit, this will be good news for millions of households.