The price cap, which Ofgem said would save 11 million households on default deals about £75 on average, removes uncertainty that has weighed on the energy market.
"Ofgem is working to have the cap in place by the end of the year", it said in a statement, adding that the price cap would protect around 11 million customers.
Ofgem's proposal, that follows recent government legislation, calls for an initial annual ceiling of £1,136 ($1,468, 1,263 euros) for households using both gas and electricity.
If you are one of the 11 million now on one then you could save more money by moving to a different energy tariff.
Dermot Nolan, chief executive of Ofgem, said: '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. However, campaigners warned this does not guarantee an end to rip-off utility bills and households should still compare prices and shop around for a better deal. Ofgem says this will allow it to put further reforms in place to make the energy market "more competitive and work better for all consumers".
The watchdog's definition is that a typical customer uses 3,100 kilowatts of electricity and 12,000 kilowatts of gas in a year.
The idea of a cap was floated by the government last year and on Ofgem pegged the limit for how much utilities can charge households on so-called standard variable tariffs at 1,136 pounds ($1,465) a year.
ScottishPower direct debit customers on default deals will save the most at £121 per year.
The long-awaited details of the energy price cap have finally been revealed, with millions of households set to benefit.
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.
Peter Earl, head of energy at Comparethemarket.com, said the move was only a temporary "sticking plaster".
The price cap does include a clause insisting on "the need to maintain incentives for domestic customers to switch to different domestic supply contracts".
"The price cap is created to be a temporary measure, in place until 2023 at the latest", the watchdog said.
However, Richard Neudegg, head of regulation at comparison site uSwitch.com, warned that Ofgem is playing a unsafe game by saying that customers will always be paying a "fair" price under the cap.
Nevertheless, the company reiterated its position that caps were not sustainable for the United Kingdom energy market.
Peter Earl, head of energy at Compare the Market, says the price cap will only protect United Kingdom households from the "worst excesses of standard variable tariffs".