What is the energy price cap and how will it impact you?

The energy market has been in turmoil this winter, with dozens of providers going bust and prices set to surge for customers when the price cap increases.

The new price cap for April 2022 was announced on 3 February. This will affect 22m households on out-of-contract tariffs. For a family using a medium amount of energy, this will increase their annual energy bill by approximately £690.

Find out:are your energy bills going to rise in April 2022?

This comes in tandem with other squeezes on the cost of living with inflation rising, grocery prices climbing and national insurance rates set to escalate too.

To help boost your understanding of how the price cap increase is likely to affect you and your household's finances, we outline what the energy price cap is and how it is likely to impact you in the coming months.

• Read more: what you can do if you're struggling to pay your energy bills

What is the energy price cap?

The price cap was introduced in 2019 to ensure that prices for customers who don't switch their energy provider or the tariff they are on are fair and reflective of costs. It is a limit on the maximum amount energy suppliers can charge for each unit of gas and electricity a household uses, as well as the maximum daily standing charge - what you pay to have your home connected to the grid.

It isn't an upper limit on what you actually pay for your energy though. The cap concerns the rates of your bill rather than your bill itself. If you use more energy than other households, you'll pay more than them.

The price cap applies to the standard and default tariffs offered by suppliers. If you're on a fixed-term energy deal, it doesn't apply to you directly. In the past, we've seen energy suppliers compete for customers by offering fixed rate tariffs considerably lower than the cap rates, but in the past six months these have all disappeared.

Fixed deals aren't immune from the increasing energy costs. Even with the new price cap in place, suppliers are likely to raise the prices on their fixed tariffs too. So you're likely to find yourself paying more for your gas and electricity when your contract ends and you look to lock in a new fixed deal.

The cap is set every six months (in April and October) by the government and calculated by energy regulator Ofgem. The regulator calculates three typical domestic consumption values (TDCVs) for 'low', 'medium' and 'high' users. These are based on the amounts of gas and electricity someone uses. For instance, a 'medium' user utilises 12,000kWh gas and 2,900kWh electricity per year.

The backstop set in October 2021 currently stands at £1,277 per year on average for a typical household paying by direct debit. In April 2022, this will increase to £1,970.

• Read more: Your questions on energy price rises and supplier failures answered

How will the 2022 energy price cap increase impact you?

The way the surge in the energy price cap will affect your household's bills is dependent on how much your bills are and what type of energy tariff you're on.

It only caps prices for customers on standard and default tariffs, so if you're on a fixed-rate energy tariff, you don't need to worry about being charged more for your energy use until the end of your contract. When your fixed deal ends, you can either sign up for a new fixed tariff or be automatically moved onto your supplier's standard rate.

Around 11 million households are currently on default or variable rates and four million are on prepayment meters. This means around 22 million households are likely to be impacted by the increased price cap come 1 April.

To find out what type of tariff you're currently on, check your energy bills, have a look at your online account, or get in touch with your supplier directly to confirm this for you.

There are a few small bits of housekeeping you can do to keep your energy payments in check:

• Opt for paperless bills and manage your account online, as some companies charge extra for paper billing;
• Pay by direct debit, which can sometimes give discounted rates;
• Send regular meter readings to make sure your bill is accurate. If you have a smart meter, it will do this automatically;
• Ensure you question any direct debit increases that seem too high. Your energy company should be able to explain the changes.
• Read more: 10 ways to save on energy bills

Why are energy prices so high in 2022?

This winter has brought about change to the energy market, with 29 firms ceasing trading to date. The latest of these was Together Energy (including Bristol Energy customers), which ceased trading on 18 January.

The problems in the energy market began when two little-known suppliers, with less than 10,000 customers combined, ran into financial difficulty in September 2021. This was swiftly followed by another seven firms, and dozens more followed in October and November 2021. While a few suppliers tend to fail each year, closures on this scale are unusual.

Companies blamed the crisis on a perfect storm of contributing factors. These include a cold winter in Europe in 2020, which put pressure on supplies and depleted stored gas supplies; a relatively windless summer making it tricky to replenish those supplies; and increased demand from Asia for liquefied natural gas, all of which caused wholesale prices to surge. Prices escalated by 250% between January and September 2021, according to trade association Oil and Gas UK. Some of the highest electricity prices on record were seen in November 2021.

The price cap, however, meant energy companies couldn't raise their prices to match the wholesale costs they have been forking out for of late. As fixed tariffs soar above the level of the cap, it's currently the best value for many households and could be for some time. Wholesale energy prices are expected to remain high until 2023, analysis by think tank the Resolution Foundation revealed.

What can you do if you can't pay your energy bills?

If you're finding it difficult to afford your energy payments, there are steps you can take. Although contacting your supplier may feel daunting, it is the first step to finding out what help you can get to reduce your bill.

Your options could include:

• A review of your payments and debt repayments
• A reduction in your payments or a payment break
• More time to pay
• Access to hardship funds
• Emergency credit

Bear in mind that you'll eventually need to pay back any credit your supplier gives you.

Energy suppliers must take certain steps before cutting off your supply. Your supplier won't cut you off if you agree a regular payment plan with it and then stick to it.

Usually, a payment plan will cover what you owe plus an amount for your current use, as well as how much you can afford to pay how much energy you will use in the future. Your energy supplier may need to ask about your income, debt and personal circumstances to work this out. They can estimate future energy use based on what you've used previously.

Should you miss a payment, your energy supplier won't disconnect your gas and electricity, but if you don't top-up your prepayment meter, your supply might stop.

In addition, there are government schemes and benefits that can help make your bills more affordable:

• The Warm Home Discount is £140 off your electricity bills if you get the Guarantee Credit element of Pension Credit. You may also qualify if you have a low income.
• The Cold Weather Payment is £25 for each seven-day period between November and April that it's below 0°C. Certain benefits qualify you for this.
• The Winter Fuel Payment is £200 if you're over 66 or £300 if you're over 80. You should get it automatically if you get the State Pension.