The level will be refreshed every six months and, like Ofgem's "safeguard tariffs" which were recently hiked, could go up or down depending on fluctuations in cost.
While the move has been warmly welcomed by consumer campaigners, there are fears some could be lulled into thinking they no longer need to bother shopping around for the best deal.
"An annual bill of £1,136 is still nearly £300 more expensive than the cheapest deal on the market", he said.
Since April, Scottish Gas owner British Gas has raised its price twice - adding a total £104 to the average bill.
Figures from Ofgem show that 57% of households - around 13 million - are on standard variable rate tariffs, which are the most expensive.
Chief executive Lawrence Slade said: "There are over 70 suppliers in the energy market who will now be assessing how this impacts their individual business".More news: Celtics guard Jabari Bird reportedly arrested for assault in Brighton
Iberdrola SA's Scottish Power and Innogy SE's Npower, which have the most expensive SVTs according to price comparison website MoneySuperMarket, will be hit harder than their United Kingdom peers.
Stephen Murray, energy expert at MoneySuperMarket, suggested there was an element of "political soundbite" to Ofgem's price cap announcement, and that there were already options in place for customers to save on energy bills now.
"Ofgem has made full use of the powers parliament has given us to propose a tough price cap which will give a fairer deal to consumers on poor value default tariffs", said the watchdog's chief executive Dermot Nolan.
Both Prime Minister Theresa May's Conservative government and the Labour opposition have backed the price cap after evidence that utilities were overcharging their customers.
The regulator was given powers by the government to introduce the cap through the Domestic Gas and Electricity (Tariff Cap) Act, which became law on 19 July, and it hopes to have the measures in place by the end of the year.
"The cap would save consumers who use a typical amount of gas and electricity around 75 pounds per year on average".More news: What is the dirtiest place at the airport? Hint: Not the washroom
The fear is that energy companies will cover the lost income due to the cap by charging other customers more and reducing the discounts that savvy switchers can get.
By the time the price cap comes in Centrica will lose about 210 million pounds for its SVT customers, which should be "manageable", according to Ahmed Farman, an analyst at Jefferies in London.
"There is concern that the price cap will make energy more expensive".
Since the government announced the price cap utilities have been trying to retain customers by moving them off SVTs and onto alternatives.
It also warned competition may be squeezed out if the price cap is set too low.More news: Water crisis: Imran Khan seeks overseas Pakistanis’ help