More frequent energy price cap updates (and bill hikes) to come
The energy regulator confirmed it will update the energy price cap every three months, rather than every six months as it is ‘no longer sustainable’ and is ‘outdated’ amid the ongoing volatility.
Ofgem said the move – from January 2023 -would “go some way” to provide the stability needed in the energy market, reducing the risk of further large-scale supplier failures.
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.
It also confirmed there will be shorter notice periods between energy price cap announcements and the implementation of the new cap at 25 working days, down from the current two months.
Ofgem explained that the energy price cap reflects what it costs to supply energy to our homes by setting a maximum suppliers can charge per unit of energy. It also caps the level of profits an energy supplier can make to 1.9%.
However, the energy price cap isn’t a limit on bills as it is based on usage, and Ofgem said it will have to increase to reflect increased costs.
An estimated 24 million people are on default standard variable tariffs (four million customers on prepayment meter and 20 million non-prepayment/credit meter users) so this number will be impacted by any changes to the energy price cap, the next one being in winter (October).
The regulator said that although Britain only imports a small amount of Russian gas, because of the war and the volatility in the global energy market experienced last winter which has “lasted much longer”, it has led to higher prices for both gas and electricity.
Today’s announcement on the change means that prices will reflect gas and electricity costs more quickly and accurately so they don’t “lag behind changes in the market”.
Ofgem added: “However, the market remains volatile and so the price cap methodology will be kept under review”.
According to the latest energy price cap predictions by consultancy Cornwall Insight, the average energy bill for Q4 2022 will rise to £3,359, while from January 2023, it is expected to reach £3,616, with energy bills remaining above £3,000 a year until at least 2024, it said.
‘Aimed at helping suppliers rather than customers’
Justina Miltienyte, head of policy at comparison site Uswitch, said: “The price cap has always been a sticking plaster to deal with the failures of the energy market. This proposed change is another attempted quick fix, aimed at helping suppliers rather than customers who are unable to switch to a better deal to escape its impact.
“A quarterly review will mean that consumers are less shielded from rising prices in the short-term. The next price change due on 1 January – just after Christmas – is already expected to increase from the price projected in October.
“The more frequent review will eventually mean that if wholesale prices start falling, Ofgem will be able to pass these cuts onto billpayers a little sooner. However, it is too early to predict when that will happen, as the market remains volatile.”
Laura Suter, head of personal finance at AJ Bell, said the change means millions of people face bills rising faster this winter with less time to prepare for it, making budgeting and planning household finances “an even bigger headache and worry”.
She said: “Ofgem said the changes mean that when wholesale prices fall people will get those reductions in their energy bills far quicker. However, the reality at the moment is that prices are rising, so every household will see their bills hiked more frequently. The timing is particularly bad as it means the first quarterly update will hit in January, at the peak of winter energy usage, when the price cap is expected to rise again.
“The moves mean that people’s direct debits for their energy usage will be changing far more regularly, which means planning your outgoings over a number of months is a near impossible task now. When so many people are budgeting at the moment and struggling to make ends meet, the uncertainty of what one of their largest bills will be is going to be a source of great worry for many.”
This is echoed by Gillian Cooper, head of energy policy at Citizens Advice, who added: “With the cost of energy only going in one direction right now, many will be worried by the idea of seeing even more frequent price changes.
“Something that’s added to all our bills is the cost of supplier failures. Changing to a quarterly price cap should limit the risk of any more suppliers going bust, which is a good thing. But our bills are already incredibly high and still rising.
“The government was right to bring in financial support for people, but it may not be enough to keep many families afloat. It must be ready to act again before winter draws in.”
In May the government announced every household in Britain would receive a non-repayable £400 energy bill discount from October amid soaring prices. It replaced the previously announced £200 energy rebate which would need to be repaid by households. See YourMoney.com’s How and when will you get the £400 energy bill discount? for more information on the cost of living support payment.
‘Volatility lasted much longer’
Jonathan Brearley, CEO of Ofgem, said: “I know this situation is deeply worrying for many people. As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably.
“The trade-offs we need to make on behalf of consumers are extremely difficult and there are simply no easy answers right now. Today’s changes ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also, that it can adapt to the current volatile market.
“We will keep working closely with the government, consumer groups and with energy companies on what further support can be provided to help with these higher prices.”