The April 2024 energy price cap: why is it dropping?

In April, the energy price cap will drop to its lowest level since March 2022.

The average home will pay 12% less for its energy between April and June than it did over the winter months – a much-needed respite for embattled consumers enduring a cost of living crisis.

In this guide, we’ll explain why the energy price cap is dropping, whether it will continue to fall as 2024 progresses, and whether costs will return to their old level.

What is the new energy price cap?

The new energy price cap is £1,690 per year for the average three-bedroom, dual fuel household that pays with direct debit – the most common situation for UK homes.

This price cap, which will be in effect from 1 April to 30 June 2024, represents a 12% drop from the January-March rate of £1,928 per year.

It’s the lowest cap for more than two years, taking us back to a time before Russia’s invasion of Ukraine raised energy costs around the globe.

Households will typically see the cost of their gas decrease from 7.42p per kWh (kilowatt-hour) to 6.04p per kWh, though the standing charge – a daily charge residents pay regardless of how much energy they use – will increase from 29.62p to 31.43p.

Overall, this represents a 16% drop in the price of gas from the current price cap.

The unit rate of electricity will fall from 28.62p per kWh to 24.5p per kWh, but the standing charge will rise again, from 53.37p to 60.1p per day – which all means electricity will cost 9% less.

Why is the energy price cap coming down?

The price cap is coming down because in the UK, the cost of electricity is largely driven by the wholesale price of gas, which has fallen over the past three months.

The two are tied together because the wholesale price of electricity is set by how much it costs to generate the last unit of electricity required to meet demand – and this almost always comes from a gas power plant.

Here are the reasons why the wholesale price has fallen:

1. The UK has diversified its gas sources
2. Warm weather has helped
3. The US has stepped up its gas production and exports
4. Gas supplies are increasing and staying high across the world

1. The UK has diversified its gas sources

The year before it invaded Ukraine, Russia provided 6.2% of the UK’s gas.

The UK has now replaced that supply in the aggregate, by increasing its gas imports from Angola, Nigeria, Peru, Trinidad and Tobago by a combined 6.2%.

And as European countries like the Netherlands became less willing to export gas as they cut themselves off from Russia, the UK turned to the US to make up any shortfall.

2. Warm weather has helped

2023 was the Earth’s hottest year on record, and probably the warmest in 100,000 years, according to European Union scientists.

While this was bad news for the climate, it was good news for gas storage levels, which have remained high in the UK and across Europe.

This has allowed European countries to feel comfortable exporting gas to the UK – and with the UK enjoying the second-warmest year in its history, its need wasn’t as high as normal.

3. The US has stepped up its gas production and exports

In 2021, the US supplied 7.5% of the UK’s gas, according to government data. 

The next year, this figure tripled to 22.4% – and with the US producing record-breaking levels of gas at the end of 2023, these exports are likely to keep growing.

This plentiful source of gas – and the UK’s more varied import portfolio – has enabled the UK to not just move away from Russian gas, but also reduce its imports from Qatar.

The UK relied on the Middle Eastern nation for 13.6% of its gas imports in 2022 – but in 2023, this figure was halved to 6.8%.

In past years, Qatar announcing in January that it wouldn’t send gas shipments through the Red Sea for the foreseeable future would have sent the UK government into a panic.

Now, the UK can turn to other sources.

4. Gas supplies are increasing and staying high across the world

Despite demand for LNG increasing rapidly in Asia – and, to a lesser extent, in Europe – supplies have more than kept pace.

In December 2023, China, Japan, and South Korea all increased their imports by around a million tons from November, in a move that could have spelled disaster.

However, the supply side met the challenge head-on. The US exported a record-breaking 8.56 million tons, and Australia also hit an all-time high by shipping out 7.26 million tons.

A downturn in industrial output across Europe – though a symptom of a bad economic outlook – has also kept energy supplies high and healthy.

With such large surpluses, governments are happy to run down their stores a bit, which is causing demand for gas to fall.

Will energy bills decrease again this year?

In July, energy bills will decrease again by 13% to £1,463, according to industry consultancy Cornwall Insight – though these figures are notoriously difficult to predict.

The consultancy has predicted there’ll then be a 4% rise in October, but this forecasted stability around the £1,500-£1,700 level is encouraging.

If it comes to pass, 2024 will be the cheapest year for energy since 2021, providing some much-needed relief for UK households – though costs are still 32% higher than they were just before Russia’s invasion of Ukraine in February 2022.

It’s tough to forecast the future of energy prices with any certainty though, as the Red Sea crisis or another unforeseen geopolitical conflict could turn everyone’s predictions upside down.

The Red Sea crisis has intensified in recent months, leading to reasonable fears that it could result in a new energy crisis – though fortunately the effect has been negligible so far.

The Houthis – an Iran-backed rebel group in Yemen – have attacked dozens of ships passing through the Red Sea, leading all major shipping companies to stop using the route in favour of a longer trip around Africa.

With the UK and US responding with air strikes on the group’s bases in Yemen, there’s a chance the conflict will escalate, but for now, the impact on your energy bills is likely to be minimal.

The UK is also better than it was at sourcing gas, though its storage capacity is still low. Germany, Italy, and the Netherlands’ capacities are all at least seven times higher.

Instead of simply building more capacity though, the better solution is for the UK to reduce its need for gas by generating its own renewable energy and encouraging the uptake of solar panels and heat pumps.

How is the energy price cap calculated?

Ofgem calculates the energy price cap with a formula that assesses the past three months of wholesale prices, then includes a long list of other factors to ensure the cap benefits consumers, suppliers, and network operators.

Depending on how wholesale energy prices are faring, they make up around 50% of the price cap. For the January 2024 energy price cap, wholesale costs totalled £985, which was 51% of the £1,928 cap.

Another 20% of your bill goes to network operators who maintain the pipes, wires, and pylons that send energy all over the country. Ofgem sometimes raises this charge to cover the cost of suppliers which have gone out of business.

Around 10% of the price cap funds the government’s initiatives to cut emissions and make the UK more energy efficient, for instance with the ECO4 scheme.

VAT makes up 5% of the energy price cap, while another 3% compensates suppliers for their spending on billing and metering consumers, including installing smart meters for free.

The remaining 10% or so goes towards other costs like headroom, supplier profit, and payment method uplifts that take into account and mitigate various costs for suppliers and operators.

What are the long term forecasts for energy bills?

It’s always hard to predict what your energy bills will look like in the long term, but we can analyse past data to get some idea of future trends.

Between 2000 and 2021, electricity prices increased by 5.5% per year on average, according to the Office for National Statistics (ONS).

This rise was caused by underlying inflation more than it was by shifts in wholesale prices, which suggests that even if wholesale price levels remain stable or drop in the future, the cost of your energy is still likely to grow.

In 2022, the energy crisis pushed prices up massively. The average energy price cap was £1,170 per year in the three years before April 2022 – and £2,074 per year since then.

But now that electricity and gas prices have come down from their energy crisis peak, we may see a return to this previous level of growth.

Over the next 21 years, the cost of electricity – and gas, since the two fuels are closely linked in price terms – could therefore again rise by 5.5% per year, on average.

One reason why electricity prices may climb beyond this rate is that the UK is moving to electrify its heating and transport methods.

Using electric-powered devices like heat pumps and electric vehicles will reduce costs and carbon emissions in the long term, but only if the UK rapidly ramps up its electricity infrastructure.

We’ll need to generate and store significantly more electricity, both to meet increasing demand and to lower costs, as electricity is currently four times more expensive than gas.

Clean, cheap sources of energy like wind and solar should be the focus for investment and construction.

What does the new price cap mean for solar panel owners?

The new energy price cap will make grid electricity a bit cheaper for everyone, including solar panel owners.

If you’re considering getting solar panels, you may see this as a reason to avoid investing in a system right now – but electricity prices are still 28% higher than they were before 2022, and we’re unlikely to ever return to those levels.

Plus, if smart export tariff suppliers don’t cut their rates, the solar electricity you send to the grid will be worth more than it was before April, compared to grid electricity.

For example, if you’re on Octopus’s 15p per kWh Outgoing Fixed tariff, each kWh of electricity you export is currently worth 52% of your imported electricity’s value – 28.62p per kWh, on average.

When the new price cap starts, your 15p per kWh exported electricity will be worth 61% of the electricity you import, which will cost 24.5p per kWh, on average.

Solar panel owners will therefore be able to reduce their electricity costs even further than before, while lessening the impact of any future price rises and making tens of thousands of pounds in savings across 25 years, on average.

And in the long term, smart export tariffs are likely to increase in comparison to your import costs, thanks to the UK moving to massively increase the amount of renewable electricity it uses.

As this green energy floods the grid, the need for storage will rise sharply, to ensure that the UK has a stable supply of electricity at all times – which will make storage more valuable.

You can already see the effects of this shift, most clearly in the Intelligent Octopus Flux tariff, which offers an extremely generous on-peak rate to make sure it has enough electricity to meet consumer demand during this high-usage period.

Another good example of this trend is the Demand Flexibility Service, which was created by the National Grid Electricity System Operator (ESO) in 2022 to reward consumers for shifting some of their energy usage outside of peak periods.

Almost every major energy supplier has now signed up to this initiative.