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What is the new energy price cap, how does it work and when will it change?

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On August 26, fgem announced that the next energy price cap would rise from £1,971 to £3,549 from October 1 as millions of households face soaring energy bills.

The increase will apply to most variable-tariff energy bills from October 1 to December 31.

For energy customers on pre-payment meters, the increase is from £2,107 to £3,608.

On September 8, Liz Truss announced a price guarantee on energy bills until 2024 which effectively overrides Ofgem’s announcement. Under this government guarantee, a typical household in Britain will pay no more than £2,500 a year for energy bills until October 2024.

Under the new prime minister’s flagship plan to deal with soaring household bills, the existing energy price cap will be replaced with an “energy price guarantee” with the government paying energy suppliers to cover the gap with market prices from 1 October.

The prime minister also announced the removal of the green levy, which will knock a further £150 off household bills.

Though Downing Street and the Treasury refused to put an estimate on the cost of the total package, it is estimated that it could cost as much as £150 billion. Whitehall insiders believe this is way too high and hope the final bill will come in below £100 billion.

After the announcement, The Liberal Democrats accused the Conservatives of bringing in a “phony freeze” on energy bills – pointing out that £2,500 will be double last winter’s £1,277 cap.

But this will bring some relief to households. The policy means households will be spared the previously anticipated leap in average bills from £1,971 to £3,549, saving an average of about £1,000 this year.

Here’s everything you need to know about who sets the energy price cap and how it works.

What is the energy price cap and what is Ofgem?

Ofgem, the Office of Gas and Electricity Markets, is the independent regulator of the British energy market, and it is designed to protect customers.

A key part of its role is to set a limit – a price cap – on what energy firms charge customers on default or standard and variable tariffs.

The price cap was launched in January 2019 by the regulator and, although it was originally a temporary measure, it has remained in place due to the ongoing problems in the industry.

The cap applies if you’re on a default energy tariff, whether you’re paying via direct debit, standard credit or a prepayment meter – it doesn’t apply to a fixed-term tariff.

Previously, variable tariffs had been more expensive than fixed-rate deals. People are often on these tariffs because they fail to switch suppliers when a fixed term has ended or their supplier has been forced to close.

But at present, fixed-term tariffs are more expensive than the cap, meaning the majority of people are affected.

Ofgem says: “The global rises we’re seeing in gas prices mean this is a very challenging time. Right now, this may mean you find few better-value tariffs than being on a supplier’s default rate covered by the government’s energy price cap if you are already on one.”

How does the energy price cap work?

The energy price cap works by stipulating a limit on the maximum amount that can be charged for a unit of gas or electricity, based on an estimate of the average household user.

This means that it’s not the maximum possible cost to a household, as if you burn a higher number of units, your energy bills will exceed the cap while, if you use less, you’ll pay less.

A maximum daily standing charge, which is the cost of getting the power to your home, is also included. The cap is determined by the costs faced by energy suppliers.

The cap is made up of network, operating and policy costs, as well as VAT and earnings. The amount is set differently depending on if you pay by a monthly or quarterly direct debit, on the receipt of a bill or prepay for your energy.

When will the energy price cap change and how much will you pay?

The “energy price guarantee” will last from October 1 for two years.

With the £400 discount on bills that many are set to receive this winter, the average household bill will be £2,100.

However, this is not a limit on how much you will pay – your bill will depend on how much energy you actually use.

What about those not on the main grid?

Those living off main gas or electricity will receive support through a fund.

No further details were given.The government will set up a fund for those using heating oil, living in park homes or those on heat networks so that all UK consumers can benefit from “equivalent support”, Ms Truss said.

Who sets the energy price cap?

Ofgem introduced the energy price cap at the start of 2019, with the aim to prevent millions of households from being overcharged.

It limits what you pay for each unit of gas and electricity while “setting a maximum daily standing charge”, reports MoneySavingExpert.com.

Ofgem’s website states that its role is to “protect consumers by working to deliver a greener, fairer energy system”.

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