How the Ofgem Energy Price Cap Actually Works: The Formula, the Lag, and Where January's Number Comes From

The single most common misunderstanding about Ofgem's energy price cap is right there in its name: it caps a price, not a bill. Specifically, it limits the pence-per-kilowatt-hour unit rate a supplier can charge for electricity and gas, and the daily standing charge that applies regardless of how much energy you use. Your actual bill is that capped rate multiplied by however much energy you actually consume — which is why two neighbours on the same tariff, one running an electric heat pump and one on gas central heating, can see very different bills under the exact same cap.

The current cap runs from 1 October to 31 December 2026, and sets the annual cost for a typical dual-fuel household paying by direct debit at £1,723 — up £60, or 4%, on the £1,663 level that applied through the third quarter. Ofgem has said that without the government's decision to remove VAT from domestic electricity, that figure would have been roughly £45 higher again.

Behind that single headline number sit two separate sets of rates. Electricity under the current cap costs 26.32p per kilowatt hour, with a daily standing charge of 54.83p, regardless of how much or how little electricity you use that day. Gas costs 7.97p per kilowatt hour, with its own daily standing charge of 29.68p — and unlike electricity, gas still carries the standard 5% VAT rate, since the government's VAT removal applied specifically to domestic electricity, not gas.

Standing charges are the part of the bill that generates the most complaints, precisely because they don't move with consumption at all — a household that goes away for a fortnight still pays both standing charges for every day of the trip. That's because standing charges are built to recover largely fixed costs: maintaining the physical gas and electricity network, metering infrastructure, and a provision suppliers are allowed to build in against customers who don't pay their bills. None of that cost shrinks just because one household used less energy in a given quarter, which is why campaigners and some MPs have periodically pushed Ofgem to shift more of the cost recovery back into the unit rate instead.

The headline £1,723 figure is a benchmark, not a prediction of what you'll actually pay, and the number behind that benchmark changed this year in a way that's easy to misread. Ofgem sets its 'typical household' assumption using Typical Domestic Consumption Values — TDCVs — which are periodically reviewed against how much energy households are actually using. From 1 July 2026, Ofgem cut the medium-use electricity benchmark from 2,700 kWh a year to 2,500 kWh, and the gas benchmark from 11,500 kWh to 9,500 kWh, reflecting genuinely falling average household consumption rather than any change to the underlying unit rates.

That distinction matters for how you read any headline price cap figure going forward: a lower TDCV benchmark can make the 'typical' annual bill look smaller even in a quarter where the actual pence-per-kWh rates haven't moved, or have even risen. If your own household uses noticeably more or less than the current 2,500 kWh electricity and 9,500 kWh gas benchmarks, the headline figure will understate or overstate what you'll actually pay by a meaningful margin — the unit rates and standing charges are what apply to your actual bill, not the £1,723 headline itself.

Ofgem reviews and resets the cap every three months, and the timing of that review is where a lot of confusion about 'why is my bill rising when gas prices are falling on the news' actually comes from. Each quarterly cap is calculated from wholesale energy prices observed over a rolling window in the months before it takes effect, rather than prices on the day the new cap starts — meaning the level that applies in January reflects where gas and power markets were trading across roughly the preceding autumn, not conditions in January itself.

Ofgem has said the next cap, covering January to March 2027, will be announced by 25 November 2026. Whatever wholesale gas and power markets do in the weeks immediately before that announcement is what will actually determine the new level — a genuinely sharp cold snap or Middle East-linked price spike in the final weeks of the observation period can move the January figure meaningfully, even if the autumn as a whole looked calmer.

Wholesale energy costs are, unsurprisingly, the single largest component built into the cap — suppliers buy power and gas ahead of time through forward contracts, and the cap is designed to let them recover roughly what a reasonably efficient supplier would have paid for that hedged position, not to guarantee them today's spot price. Network charges — the cost of maintaining the transmission and distribution grid that physically carries electricity and gas to your home — make up a large fixed slice on top, recovered mainly through the standing charge rather than the unit rate. Layered on top of both are policy and environmental costs — schemes like the Renewables Obligation and the Energy Company Obligation that fund renewable generation and insulation support — plus suppliers' own operating costs, a bad debt allowance to cover customers who don't pay, and a capped supplier profit margin that Ofgem fixes at a level intended to be enough to keep suppliers solvent without letting the cap become a source of excess profit.

One structural change worth understanding, separate from the numbers themselves, is standing charge levelisation — Ofgem's policy of aligning the standing charges paid by prepayment meter customers with those paid by direct debit customers, rather than letting prepayment customers, historically often among the least well-off, pay a higher fixed daily charge purely because of their payment method.

For a typical household trying to actually budget rather than just track the headline number, the practical exercise is straightforward: take your own actual annual electricity and gas usage in kWh, multiply by the current unit rates, add 365 days of both standing charges, and you'll get a far more accurate estimate of your real bill than the £1,723 headline offers on its own — particularly if your usage sits well above or below the current 2,500 kWh / 9,500 kWh benchmarks the headline figure assumes.

Looking toward the next reset, the practical driver to watch isn't the calendar date of Ofgem's announcement — it's what happens to wholesale gas and power prices in the weeks feeding into that assessment window, shaped by everything from European storage levels to geopolitical risk affecting global gas supply. Households with a fixed-term tariff already locked in are insulated from whatever that number turns out to be; anyone on a standard variable tariff linked to the cap will see it flow through automatically from 1 January, whichever direction it moves.