Energy price cap: Ofgem July 2024 new UK energy price cap explained - electricity prices prediction, forecast

The average household energy bill will decrease by 7% in July, as Ofgem lowers its price cap due to reduced wholesale prices - the amount energy firms pay for gas and electricity before supplying it to households.

The regulator revealed that the price cap will decrease from the current £1,690 to £1,568 for a typical dual fuel household in England, Scotland and Wales, resulting in an annual reduction of £122.

This new cap is approximately £500 less than the one set in July of last year, which was £2,074. Energy is regulated separately in Northern Ireland, where prices are also falling.

The energy price cap was introduced by the Government in January 2019 and sets a maximum price that energy suppliers can charge consumers in England, Scotland and Wales for each kilowatt hour (kWh) of energy they use.

It aims to ensure that prices for customers on default energy tariffs are a fair reflection of the cost paid by suppliers for wholesale energy, and that the profit firms make is capped.

But what does the latest change to the cap mean for the average person, and will it see you make a real-terms saving on your energy bills? Here is everything you need to know.

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What does the price cap drop mean for me?

Ofgem sets its cap every three months as the average amount paid by the typical household.

It is important to note though that Ofgem’s cap does not set a maximum amount for the actual bill households receive – those who use more than the average amount will pay more, and those who use less will pay less.

The latest cap will see prices fall to their lowest level since Russia’s invasion of Ukraine in February 2022, which caused a further spike in an already turbulent wholesale energy market, driving up costs for suppliers and ultimately customers.

But Citizens Advice chief executive Dame Clare Moriarty said the news would give only “small comfort” to households still facing cost-of-living pressures.

She said: “The fall in the energy price cap reduces bills slightly, but our data tells us millions have fallen into the red or are unable to cover their essential costs every month.

“People cannot rely on lower energy prices alone to escape the financial issues they’ve been experiencing. That’s why we need better targeted energy bill support for those really struggling to keep the lights on or cook a hot meal.”

What if I’m on a prepayment meter?

Households on prepayment meters will pay the same as those on direct debit after Ofgem decided to start balancing standing charges between prepayment and direct debit customers from April.

This will stop prepayment customers having to pay more than others for their energy.

Ofgem says this change means prepayment customers who get their electricity and gas from the same supplier will save around £52 a year because of this change, while people who pay by direct debit will pay an extra £10 per year to account for it.

Will the falling price cap mean the return of switching?

It is expected that more competitive fixed deals may return to the market amid the predicted relative stability of prices over the coming months.

Which? has advised that for those on a fixed deal who think they might be paying more than the price cap come the summer, it could be worth checking the exit fees to see if they would save money by leaving early.

The watchdog said: “As a rule of thumb, we wouldn’t recommend fixing a contract longer than 12 months, higher than the July price cap or with significant exit fees.”

Will energy costs continue to fall?

Mike Thornton, chief executive of the Energy Saving Trust, said “no-one should take this lower price cap as a sign of stability,” and indeed, if forecasts are accurate, the cap will rise again in October.

Cornwall Insight – whose forecasts have consistently been nearly identical to Ofgem’s actual price rises and falls – says it does not expect energy prices to return to pre-Covid levels before the end of the decade at the earliest.

And it warned that prices remain subject to wholesale market volatility, with the UK’s reliance on energy imports meaning that geopolitical incidents could continue to have a significant impact.

Read more: Ofgem considering 'dynamic' price cap with time-of-use rates to shape future energy costs

Ofgem is currently reviewing the price cap and looking at how it is calculated. This includes mulling over changes to standing charges, which are fixed daily charges that cover the cost of supply connections.

It could also opt for a new “dynamic” price cap that would take into account the time of day that households use energy.

As renewable energy sources become more and more prevalent in the electricity sector, Ofgem said consumers would be rewarded for shifting the time of their energy consumption, which would in turn reduce costs for everyone.

The adoption of time-of-use tariffs by more households may make it more difficult to maintain an all-inclusive price cap that is suitable for everyone.