How does the energy price cap work?

Your gas and electricity bills are made up of two parts: a unit rate, which is the price per kilowatt hour (kWh) of energy you use, and a standing charge, a fixed daily amount you pay regardless of use. The price cap sets a maximum for both on standard variable and default tariffs.

Suppliers can charge less than the cap, but not more. Most households that have never switched, or whose fixed deal ended without them choosing a new one, are on a capped tariff. The cap is set by Ofgem, the energy regulator for Great Britain. Northern Ireland has a separate energy market and isn't covered.

One of the most common misunderstandings is that the cap limits how much you can pay in a year. It doesn't. Because it limits the rate per unit, a household that uses more energy will pay more, and there's no upper limit on the total.

When the cap changes, you'll often see a figure for a "typical" household's annual bill. That's an illustration based on average usage, not what you'll pay. Your own bill depends on how much energy you use and on your rates.

Ofgem reviews the cap every quarter and normally announces the new level ahead of each period, so capped rates can change several times a year. When the cap changes, your supplier can change its standard variable rates to match, and should let you know.

The cap is calculated from the costs of supplying energy, including:

• Wholesale energy prices, usually the biggest factor
• Network costs for maintaining and running the gas and electricity networks
• Government policy costs, such as social and environmental schemes
• Suppliers' operating costs and an allowed margin
• VAT

There isn't one single capped rate for everyone. The cap varies by region, reflecting differences in network costs, and by payment method — for example, paying by direct debit, on receipt of a bill, or with a prepayment meter. Different meter types, such as Economy 7, also have their own capped rates.

Your bill or online account should show your current unit rates and standing charges, which you can use to compare with other tariffs.

Fixed tariffs aren't covered by the price cap. They lock in your unit rates and standing charges for a set period and can be priced above or below the current cap. When comparing a fixed deal, it helps to compare its rates with the capped rates you'd otherwise pay, and to check any exit fees.

If you're on a capped tariff, you can usually switch supplier without exit fees. Whatever tariff you're on, using less energy is the only way to bring the total down, so energy efficiency and accurate meter readings both matter.