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Could the energy price cap be recalculated?

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Written by: Emma Lunn
29/10/2021
Ofgem is considering changing the methodology it uses to calculate the energy price cap to help energy suppliers cover their costs.

The energy regulator says it is taking steps in order to protect the short and long-term interests of consumers. The move comes after 13 energy suppliers have gone bust in the past two months.

Ofgem said that “unprecedented and unexpected rise in gas and electricity prices” over recent months had put energy markets under severe strain.

In a letter to suppliers published on the Ofgem website, the regulator said that it was considering changing the price cap process as gas costs continue to challenge suppliers. The energy price cap means energy firms are unable to pass soaring wholesale energy costs onto customers.

The letter said it was Ofgem’s intention “to consult on the price cap methodology to ensure it appropriately reflects the costs, risks and uncertainties facing suppliers” and that it expects suppliers to “continue to comply with their licence obligations including providing support to their most vulnerable consumers”.

The letter said: “The price cap methodology includes a range of mechanisms to allow suppliers to recover uncertain costs based on what was considered reasonable at the time. We will consult on whether these existing mechanisms should be adjusted in light of the increased costs and risks facing suppliers.

“This is in line with the requirements set out in legislation, which require Ofgem to protect consumer interests, and have regard to the need for suppliers to finance their efficient costs, which we believe is essential to retain a competitive retail market that delivers for consumers.”

Ofgem expects to publish the consultation in November, setting out the options it is considering and its ‘minded-to position’.

After considering stakeholder responses, it then expects to publish a decision in February 2022. This would allow it to implement any changes in the forthcoming price cap period (from 1 April 2022), if appropriate to do so.

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