What the change in the energy price cap means - and why it is going up

The small increase in domestic energy bills announced today confirms that prices have stabilised since the ruinous spikes that followed Russia's invasion of Ukraine, but remain 40% higher than before the war - around 20% in real terms - with little chance of falling in the medium-term.

Any increase in the annual cost of gas and electricity is unwelcome. But, at 2%, it is so marginal that in practice many consumers will not notice it unless they pay close attention to their consumption.

Regulator Ofgem uses a notional figure for "typical" annual consumption of gas and electricity to capture the impact of price change, which shows a £34 increase to £1,755. Money latest: Should I fix? Reaction to energy price cap shift At less than £3 a month, it's a small increase that could be wiped out by a warm week in October, doubled by an early cold snap, and only applies to those households that pay a variable rate for their power.

That number is declining as 37% of customers now take advantage of cheaper fixed rate deals that have returned to the market, as well as direct debit payments, options often not available to those struggling most. Ofgem's headline number is useful as a guide, but what really counts is how much energy you use, and the cap the regulator applies to the underlying unit prices and standing charges.

Here, the maximum chargeable rate for electricity rises from 25.73p per kWh to 26.35p, while the unit cost of gas actually falls, from 6.33p per kWh to 6.26p. Daily standing charges for both increase, however, by a total of 7p.

That increase provides an insight into the factors that will determine prices today and in future. The biggest factor remains the international price of wholesale gas.

It was what drove prices north of £4,000 a year after the pipelines to Russia were turned off, and has dragged them back down as Norway and liquid natural gas imported from the US, Australia and Qatar filled the gap. The long-term solution is to replace reliance on gas with renewable and low-carbon sources of energy, but shifting the balance comes with an up-front cost shared by all bill payers.

So too is the cost of energy poverty that has soared since 2022. This price cap includes an increase to cover "balancing costs".

These are fees typically paid to renewable generators to stop producing electricity because the national grid can't always handle the transfer of power from Scotland, where the bulk is produced, to the south, where the lion's share is consumed. There is also an increase to cover the expansion of the Warm Homes Discount, a £150 payment extended to 2.7 million people by the government during the torturous process of withdrawing and then partially re-instating the winter fuel payment to pensioners.

And while the unit price of gas has actually fallen, the daily standing charge, which covers the cost of maintaining the gas network, has risen by 4p, somewhat counterintuitively, because we are using less. While warmer weather and greater efficiency of homes mean consumption has fallen, the cost of maintaining the network remains, and has to be shared across fewer units of gas.

Expect that trend to be magnified as gas use declines but remains essential to maintaining electricity supply at short notice on a grid dominated by renewables. And we can expect further increases to come next year when the cost of building the new nuclear power station at Sizewell C starts to appear on bills.

That's expected to add around £10 to every bill for the next 40 years. As with wind power and grid upgrades, the future benefits are paid for today..