Millions of households will see their energy bills rise from next year after Ofgem announced its new price cap.

The price cap will increase from £1,834 a year to £1,928 for a typical dual fuel household paying by direct debit. The new price cap will cover from January 1 until March 31.

On top of higher than normal prices, households will also not be receiving the £400 energy bill discount this winter from the Government, which was issued in £66 or £67 monthly instalments from October 2022 until March this year.

Jonathan Brearley, CEO of Ofgem, said: “This is a difficult time for many people, and any increase in bills will be worrying. But this rise – around the levels we saw in August – is a result of the wholesale cost of gas and electricity rising, which needs to be reflected in the price that we all pay. It is important that customers are supported and we have made clear to suppliers that we expect them to identify and offer help to those who are struggling with bills.”

The price cap covers around 29 million people. However, despite what its name suggests, there is not actually a total cap on what you can pay for energy. Here is what you need to know.

What is the Ofgem price cap?

The Ofgem price cap limits what you pay for each unit of gas and electricity that you use, plus it sets a maximum daily standing charge. This means your total annual bill depends on how much energy you actually use - so it could be more or less than the price cap figure.

Standing charges are a fixed daily amount you have to pay for energy, no matter how much you use. The price cap figure is used to describe what someone with typical energy consumption can expect to pay each year, based on how much Ofgem reckons the typical household uses.

To confuse matters, Ofgem recently changed how much energy it assumes an average household uses, due to people using less gas and electricity to save money. Ofgem assumes the average household consumes 2,700 kwh of electricity and 11,500 kWh of gas over 12 months.

There are slight regional variations in terms of the rates you're charged under the price cap, with headline numbers used to give an average across England, Scotland and Wales. How you pay for your energy will also affect your overall bill.

How much are the unit rates and standing charges?

The unit rate for gas is rising from 6.89p per kilowatt hour (kWh) to 7.42p per kWh. The unit rate for gas will fall slightly from 29.62p per day to 29.60p per day.

The unit rate for electricity is going up from 27.35p per kWh to 28.62p per kWh. The unit rate for electricity is dropping marginally from 53.37p per day to 53.35p per day.

How do I know if I am on the Ofgem price cap?

You’ll be paying the price cap if you’re on a standard variable rate (SVR) tariff - so if you’re not locked into a fixed deal. Many fixes disappeared during the height of the energy crisis - but they've now started to return.

Many fixed rate deals are for existing customers though there have been some new customer deals, although these tend to only be around for a short time.

I have a prepayment meter - how much will I pay?

The price cap for the typical household with a prepayment meter is rising to £1,960 a year. However, the Government is continuing to add a small subsidy to the prepayment price cap, after promising these households won't pay more than those on direct debit.

For those who pay on receipt of their bill, the figure is going down from £2,058 a year. These are typically households that don't have a direct debit or prepayment meter set up.

How does Ofgem calculate its price cap?

The main factor that decides the Ofgem price cap is the cost of wholesale energy. The assessment period for wholesale energy prices for the new price cap was from August 18, 2023, to November 15, 2023.

Other elements include things such as the cost of maintaining pipes and wires that carry gas and electricity, network and operating costs, as well as VAT, payment method allowances and profits for the energy supplier.

Ofgem updates its price cap every three months. It used to be changed every six months but Ofgem started updating it more regularly to reflect changing wholesale prices.