What is the October energy price cap? New Ofgem gas and electricity prices announcement explained

Ofgem has announced the new level of the energy price cap (25 August), with the latest news set to mean household energy bills in England, Scotland and Wales will fall to their lowest rate for 18 months.

Set to come in from October, the energy regulator’s announcement has been the first since energy bills came down significantly in July. Back then, the upper limit fell from £2,500 a year for a typical household under the energy price guarantee to £2,074 under the price cap - a drop equivalent to £35.50 a month.

This reduction hasn’t compensated for the end of the government’s winter energy bills support. Indeed, energy bills will still be higher this coming winter than they were last year, according to analysis by the Resolution Foundation. But the reductions in the price cap means some competitive fixed rate deals are starting to return to the market.

While energy bills are going down, something that helped inflation fall significantly in July, concerns remain about the volatility of gas and electricity costs. Wholesale prices soared this week over fears that workers at gas export plants in Australia would go on strike - a situation that could have significantly hiked domestic energy bills in 2024 due to the lag between the Ofgem price cap and wholesale energy costs. Fortunately, this scenario has been averted - for now.

So, what does the latest energy price cap announcement tell us - and what will it mean for your bills?

When is the next energy price cap announcement?

Since August 2022, Ofgem has calculated the energy price cap on a quarterly basis. With most households falling onto the limit after the fixed rate market crashed in late 2021, the energy regulator felt compelled to bring in more announcements a year so that falls in energy prices could feed more rapidly into household bills.

This is why we got another price cap announcement on Friday (25 August). It told us the energy bills limit for the three months between 1 October and 31 December. We will find out the rate of the price cap for the first quarter of 2024 in late November.

What will the Ofgem energy price cap for October 2023 be?

Ofgem has announced that the energy price cap from Sunday 1 October will be £1,923 a year for a typical household in England, Wales and Scotland. In practice, it means energy suppliers will be able to charge a maximum of 6.89p per kilowatt hour (kWh) for gas and 27.35p per kWh for electricity.

Compared to current rates, energy bills will drop by the equivalent of £151 a year (7%). However, given there will be another price cap announcement in just three months’ time, a more meaningful way of thinking about it is that bills for the average UK home will fall by £12.58 a month from October.

The latest fall in domestic prices has been prompted by falling wholesale costs. Global demand for gas has weakened compared to 2022, partly because European countries have filled up their reserves close to capacity in preparation for another winter without Russian gas.

It means the price cap has dropped to its lowest level since March 2022. But energy bills are still much higher than they were back then - the price cap was just under £1,300, so energy bills are still almost 50% (more than £600 a year) higher than they were.

What has the reaction to the Ofgem news been?

Speaking in the wake of the announcement, Ofgem chief executive Jonathan Brearley said: “It is welcome news that the price cap continues to fall, however we know people are struggling with the wider cost of living challenges and I can’t offer any certainty that things will ease this winter.”

He added that as prices have eased, the energy regulator is allowing suppliers to earn a little bit more money from their customers. “This means there should be no excuses for suppliers not to be doing all they can to support their customers this winter, and to reinforce this we’ll be introducing a consumer code of conduct which we will look to have in place by winter,” he said.

The code of conduct includes rules for suppliers around customer service phonelines and the ease at which people can get hold of their providers. It follows several large fines for some of the biggest UK energy firms over failings to properly manage complaints and switching.

Responding to the latest Ofgem news, Which? director of policy and advocacy, Rocio Concha provided advice for bill payers. She said: “Even with this drop in prices from October, energy bills are significantly higher than they were before the energy crisis began – meaning some households will still struggle to afford their bill. If you are concerned about struggling to pay higher bills, there is help available. Speak to your energy provider about a payment plan you can afford and check to see if you qualify for any government schemes.”