The price cap manual

Buy petrol and you pay for petrol. Buy energy and you pay for two separate things at once, and only one of them depends on how much you use.

The first is the unit rate, charged per kilowatt-hour. A kilowatt-hour is an hour of a one-kilowatt appliance: an electric shower for six minutes, an oven for about half an hour, a fridge for most of a day. This quarter the cap allows an average of 26.32p for a kilowatt-hour of electricity and 7.97p for gas. Gas looks cheap per unit because it is, which is why a house heated by gas burns roughly four times as many gas units as electric ones and still pays less for them.

The second is the standing charge, levied every day whether the house is occupied or empty. It pays for the meter, the connection, the network reaching your street and a share of the costs left behind by suppliers that failed. The cap allows 54.83p a day for electricity and 29.68p for gas — about £308 a year before anyone switches anything on.

The cap sets a maximum for each of those four numbers separately, for every region and every payment method. It does not set a maximum for their sum, because their sum depends on you.

The cap is not a judgement about what energy should cost. It is an arithmetic exercise: Ofgem takes 11 separately calculated allowances, adds them up, applies one transfer between payment methods and one tax, and whatever comes out is the cap. Ofgem’s own letter this quarter says so in as many words — in updating the price cap in this way, we are not making a policy decision or exercising a judgment.

Add the layers one at a time. Each is a real allowance with its own model, its own annex and its own update cycle.

Two things are worth noticing once the stack is complete. Wholesale is 47% of the total and the only part that moves much between quarters. And the last two layers, levelisation and VAT, are not allowances at all: one moves money between customers and the other is tax. They are the difference between Ofgem’s cap workbook and the cap suppliers are actually bound by.

The split between the fuels is the part worth carrying away. The 11 allowances come to £854.70 of electricity and £819.39 of gas, and it is the gas half that VAT is charged on — after levelisation, not before. Section 08 is that one step.

Ofgem does not look at today’s gas price. A supplier cannot buy a winter’s worth of gas on the morning the cap starts, so the allowance reflects what buying steadily over months would have cost — an average of forward contract prices observed across a three-month window that closes eight days before the announcement.

For the worked-example cap effective from 1 Oct 2026, that window ran from 19 May 2026 to 18 Aug 2026 and contained 65 observation days. Nothing that happened to the gas price after 18 Aug 2026 is in it. The wholesale observation window for this worked example is closed; other allowances also contribute to Ofgem’s final cap.

What is assumed, and what is known

The live counter follows the next unclosed calendar in the published Annex 2 workbook. It advances when a window closes, even before a new cap starts. Elapsed dates are calendar progress, not a guarantee that market prices have arrived or that the whole cap is fixed. The table below describes the January 2027 worked example.

The lag cuts both ways, which is the part most commentary misses. When prices fall in September the cap does not, because September sits outside the window — and when prices spiked in 2022 the cap took months to catch up too. The same mechanism that keeps the cap high after a fall is the one that kept it low during a rise.

Energy has to travel from where it is made to where you are, and somebody owns every metre of that journey. For electricity it is two businesses: National Grid moves power around the country at high voltage, and one of 14 distribution network operators runs the lower-voltage cables reaching your street. For gas it is the national transmission system and then a regional distribution network. None of them sell you anything. All of them charge your supplier, and your supplier passes it on.

The charges are not negotiated. Each network publishes a charging statement, and those statements are what Ofgem reads. Annex 3 takes the published charges, applies assumptions about typical consumption and about how much energy is lost as heat on the way, and turns them into an allowance in pounds per customer per year.

This is where regional variation enters the cap and it is the only place it does. Wholesale, policy, operating costs and margin are the same number wherever you live. Network costs are not, because maintaining cables across the Highlands does not cost what maintaining cables across Islington costs. Two households with identical usage, the same supplier and the same tariff are capped at different prices, and the gap this quarter is £132 a year.

Most of that difference lands in the standing charge rather than the unit rate, which matters more than it sounds. A unit rate only costs you when you use energy. A standing charge is levied every day regardless.

Once every allowance is added up, Ofgem does one more thing: it moves money between payment methods. Prepayment customers used to pay more than anyone else despite paying in advance, which was hard to defend and harder to explain. Since 2024 the cap corrects it, and the correction is a line in the calculation rather than a policy footnote.

The numbers look lopsided because they are per household. There are far more direct debit accounts than prepayment ones, so a small charge on the many funds a large discount for the few, and Ofgem sets the rates from the actual account counts each quarter. Standard credit sits it out entirely: paying on receipt of a bill already carries its own allowance for the cost of chasing late payment, which is why it is the dearest of the three before any transfer happens.

This step is also the difference between Ofgem’s cap workbook and its published cap tables. The workbook stops before levelisation. Annex 9 applies it, and Annex 9’s output is what the licence binds suppliers to — a distinction that matters to anyone rebuilding these figures, because the two differ by about half a per cent on direct debit and three per cent on prepayment.

It also decides what VAT is charged on. Direct debit’s £8.05 does not vanish into a total — it lands on the two fuels, and the £819.39 of gas in the stack becomes £823.95. That is the figure section 08 takes 5% of.

Ofgem sets a separate maximum for each of the 14 electricity distribution regions. Your gas region is the same one, which surprises people: Annex 3 takes gas network charges by local distribution zone and redistributes them onto the electricity map by the share of homes each area covers, so your gas standing charge is decided by which electricity region you sit in rather than by which gas network serves you.

This is the section that contains the guide’s main point. There is no national cap that is then broken down by region. It is the other way round: Ofgem calculates 14 regional caps, and the headline everyone quotes — £1,723.36 — is their plain average. Nobody is capped at the headline. It is the mean of 14 numbers running from £1,672.27 in East Midlands to £1,804.30 in N Wales and Mersey.

See every region’s unit rates, standing charges and network costs on a map, or find yours by postcode.

Every headline you have read about the price cap is a multiplication. Ofgem takes the four capped rates, multiplies them by an assumed annual consumption and 365 days, and publishes the result as the cap for a typical household. The rates are regulation. The typical household is an assumption, and Ofgem revises it when the housing stock changes.

It has been revised twice in a year. Until December 2025 typical use meant 3,100 kWh of electricity and 12,000 kWh of gas. In January 2026 it became 2,700 and 11,500. On 1 July 2026 it became 2,500 and 9,500, and that single change knocked £199 off the published headline for a quarter in which no capped rate moved at all. Homes are better insulated, more of them have heat pumps and solar, and the old figures had drifted away from what people actually use.

The consequence matters for anything you read that compares one quarter to another. A headline cap is only comparable to another headline cap computed on the same assumption, and for most of 2026 the press quoted both. If you see two figures attached to the same quarter, neither is necessarily wrong — they may be the same rates multiplied by two different households.

Domestic energy has carried VAT at 5% since 1994. From 1 Oct 2026 to 31 Mar 2027 the Government has removed it from electricity entirely, leaving gas unchanged. It is the last step in the calculation, applied after every allowance and after levelisation, so it scales the whole thing.

That ordering is the detail worth getting right, and it is the one most easily got wrong. VAT is not 5% of the £819.39 of gas in the stack. Levelisation lands first, taking the gas half to £823.95, and 5% of that is £41.20. Taking 5% of the bare stack instead gives £40.97 — close enough to look right, wrong by the amount that tells you somebody skipped a step.

This quarter VAT is worth about £41 on a dual fuel bill, and it is the reason the cap rose 4% rather than more: the wholesale allowance went up 11%, and the VAT cut took roughly half of that back. Both facts are true at once, which is why the announcement was reported in two contradictory ways.

The part to diary is what happens next. Unless something changes, VAT returns to electricity on 1 Apr 2027 and the April cap will rise by roughly the amount it fell — for a reason that has nothing to do with energy markets, will not appear in any wholesale forecast, and will surprise anyone not expecting it.

Two lines, and the gap between them is the point of this section. The first is what Ofgem published at the time, each quarter computed on whatever typical household was current. The second is every one of those quarters recomputed on today’s typical household, so the line measures prices rather than assumptions.

They diverge by more than £300 for most of the series, and they converge only from July 2026 when the current definition took effect. Anyone charting the published headline alone is charting two different things joined end to end.

Three things the record shows

The peak was Jan 2023 to Mar 2023, when the cap reached £4,414 as published — £3,582 on today’s household. Almost nobody paid it: the Energy Price Guarantee held actual bills well below the cap through that winter, so the line above is the cap level, not what landed on doormats.

The fall since is real but partial. On a consistent basis the cap is now about half its 2023 peak and still roughly 75% above where it sat in 2021. And the recent direction depends entirely on which line you read: the published series rose £82 between April and October 2026, while the like-for-like series rose £246 over the same six months. Ofgem’s own commentary used the second, which is why its July announcement described a 13% rise that the raw headlines appear to show as 1%.

This is the most common misunderstanding about the cap and it costs people money, because believing your bill is capped is a reason not to check it. The cap limits what a supplier may charge per unit and per day on a standard variable tariff. It sets no limit whatever on what you pay, because that depends on how much you use. A household using twice the typical amount pays roughly twice as much and the cap has not been breached.

Two smaller points follow from the same misreading. Suppliers may charge less than the cap and often do, so a fixed deal below it is not a loophole — it is the market the cap exists to make safe. And nothing in the cap is paid for by the Government: every pound of it comes from customers, including the levelisation transfer and the policy levies.

The headline is an average of 14 regions multiplied by a household that does not exist. Yours is the same four multiplications on your region, your meter and your usage — and this shows all four. Choose your region from the list; the 14 names are Ofgem’s own, and section 06 has a map if you are not sure which one you are in.

What comes out is a ceiling and not a quotation. It is the most a supplier may charge someone on a standard variable tariff with those rates and that usage. These worked-example rates apply to October–December 2026. A fixed deal may be lower, and later cap periods use different rates. See the current cap tracker for the latest period.