Energy price cap to be re-set every three months
Ofgem has published a formal consultation proposing to give it powers to adjust the energy price cap more frequently to balance the rise in wholesale market prices facing suppliers, with the need to ensure billpayers pay a fair price.
The energy price cap is a limit on the unit rate and standard charge that energy firms can set, however it isn’t a cap on the total bill a customer will pay.
Currently it’s adjusted bi-annually, so a calculation is made in February with the cap effective from 1 April, and then another calculation is made in August with the cap effective from 1 October.
The energy price cap has already gone up from £1,277 to a record high of £1,971 a year from April 2022, but Ofgem warned it could increase again in October, and potentially in January 2023 under these proposals.
It originally proposed to review the energy price cap four times a year rather than two back in February 2022, but now this has moved to a ‘minded-to’ consultation.
Further, Ofgem is also proposing to bring in a shorter notice period of 25 working days between setting the cap level and it taking effect.
This comes as Ofgem revealed more people are now under the scope of the energy price cap, with 23 million people on a default standard variable rate whose bills will be impacted by the more frequent moves.
This is an increase of one million billpayers since February, and seven million since the energy price cap was introduced in 2019.
Ofgem said these changes will reduce the risks associated with providing the default price cap tariff in volatile wholesale markets – which in turn reduces costs for customers in the short and longer-term.
Further, another aim is to prevent more suppliers going bust. Since January 2021, 30 energy providers have collapsed and Ofgem said the changes would help energy suppliers plan better.
Another intervention measure announced by Ofgem relates to the Market Stabilisation Charge which will come into effect on 25 May. This will see the receiving firm having to pay 85% difference to the customer’s old firm.
Martin Lewis, founder of Moneysavingexpert, tweeted: “It’s a disaster that means if wholesale prices fall & a new firm gets a switcher, it must pay 85% of difference to old firm. Killing hopes of firms launching cheaper deals.”
‘Unprecedented market conditions’
Jonathan Brearley, CEO of Ofgem, said: “Our top priority is to protect consumers by ensuring a fair and resilient energy market that works for everyone. Our retail reforms will ensure that consumers are paying a fair price for their energy while ensuring resilience across the sector.
“Today’s proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers. It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers.
“The last year has shown that we need to make changes to the price cap so that suppliers are better able to manage risks in these unprecedented market conditions.”
‘Another attempted quick fix’
Justina Miltienyte, head of policy at Uswitch, said: “Until now, the price cap has at best acted as a delay mechanism for the pain of rising wholesale prices, but it is unable to prevent harsh increases hitting customers altogether. A quarterly review means that the ability of the cap to delay the pain of rising prices is shorter.
“Conversely, if wholesale prices start falling, Ofgem would have the ability to pass these through to those on standard plans a little sooner.
“The price cap has always been a sticking plaster to deal with the problems of the energy market, and this proposed change is another attempted quick fix. The cap fails to give real, meaningful help to those who need it the most and this has been brought into extreme focus as costs have rocketed. More fundamental longer-term reform is still needed.”
The consultation runs until 14 June and Ofgem intends to take a decision ahead of the next cap update in August 2022.