The reduction will come into effect from July 1, with the price cap dropping from £32,80 per year to £2,074 per year to reflect the recent falls in wholesale energy prices.
The lower cap will replace the Government’s Energy Price Guarantee (EPG), which currently limits the typical household energy bill to around £2,500.
It means the average household will see their annual bill drop by £426.
It is the first time prices have fallen since the start of the global gas crisis more than 18 months ago.
Ofgem chief executive Jonathan Brearley said more focus will be needed for government, the regulator and the industry to support the most vulnerable groups this winter.
Mr Brearley said: “After a difficult winter for consumers it is encouraging to see signs that the market is stabilising and prices are moving in the right direction. People should start seeing cheaper energy bills from the start of July, and that is a welcome step towards lower costs.
“However, we know people are still finding it hard, the cost-of-living crisis continues and these bills will still be troubling many people up and down the country. Where people are struggling, we urge them to contact their supplier who will be able to offer a range of support, such as payment plans or access to hardship funds.
“In the medium term, we’re unlikely to see prices return to the levels we saw before the energy crisis, and therefore we believe that it is imperative that government, Ofgem, consumer groups and the wider industry work together to support vulnerable groups. In particular, we will continue to work with government to look at all options.”
The energy Price Cap will change from 1 July 2023
The new #PriceCap is £2,074
The level is based on typical use of an average household on their supplier’s standard default tariff
It’s a cap on energy unit price, not a cap on total bills
More ➡️ pic.twitter.com/hrtBuvCzsC
— Ofgem (@ofgem) May 25, 2023
Martin Lewis, founder of MoneySavingExpert, said: “This will be a relief for many, yet most will still be paying more for their energy than during the winter.
“This is because, apart from for those with high use, the drop in the rates doesn’t make up for the £66 per month state support people got until April – and most are on monthly direct debit, which means they pay the same in summer as winter.
“Overall, this still leaves people paying double or more what they did before the energy crisis hit in October 2021.
“The fact the state is paying far less than planned to support people’s bills means there is some wriggle room here for targeted support for another hard winter coming for those who are just above the benefits threshold. Though I’m not holding out much hope that it’ll happen.”
The cap does not set the maximum a household will pay for their energy but limits the amount providers can charge them per unit of gas or electricity, so those who use more energy will pay more.
The standing charge – the roughly £300 paid each year by households just to access gas and electricity – has not been included in the cap and will not fall.
Energy is regulated separately in Northern Ireland, where bills will be held at £1,950 per year for an average household.