Cornwall Insight has again raised its prediction for the upcoming price cap periods, with a typical household now expected to pay £4,266 a year for the three months to March 2023.
Meanwhile, its prediction for the October Default Tariff Price Cap has also risen by over £200, to now sit at £3,582.
The increases reflect both changes to the wholesale market expected in the intervening period and a change to the calculation methodology set by Ofgem.
Following the regulator’s initial proposals in May, it has now stated that an element of supplier costs associated with wholesale market hedging – known as backwardation – will be explicitly included within the cap.
Whilst it had previously suggested this would be recovered over a 12-month period, Ofgem has now announced that it will be recovered over six months, resulting in higher bills than previously forecast for the January cap, Cornwall Insight noted.
“Many may consider the changes made by Ofgem to the hedging formula, which have contributed to the predicted increase in bills, to be unwise at a time when so many people are already struggling,” said Dr Craig Lowrey, principal consultant at Cornwall Insight.
“However, with many energy suppliers under financial pressure, and some currently making a loss, maintaining the current timeframe for suppliers to recover their hedging costs could risk a repeat of the sizeable exodus seen in 2021. Given that the costs of supplier failure are ultimately met by consumers through their energy bills, a change which means that this is less likely is welcome, even if the timing of it may well not be.”
High wholesale prices over the second half of 2021 and into the beginning of 2022 led to nearly 30 suppliers collapsing, along with Bulb entering Special Administration, since September. The estimated cost of these failures is expected to add £4.6 billion – or £164 per household – to customers’ bills.
“Rather than critiquing the methodology of the cap, it may be time to consider the cap’s place altogether. After all, if it is not controlling consumer prices, and is damaging suppliers’ business models, we must wonder if it is fit for purpose – especially in these times of unprecedented energy market conditions,” continued Dr Lowrey.
“It is essential that the government use our predictions to spur on a review of the support package being offered to consumers. If the £400 was not enough to make a dent in the impact of our previous forecast, it most certainly is not enough now. The government must make introducing more support over the first two quarters of 2023 a number one priority. In the longer-term, a social tariff or other support mechanism to target support at the most vulnerable in society are options that we at Cornwall Insight have proposed previously. Right now, the current price cap is not working for consumers, suppliers, or the economy.”
Cornwall Insight noted along with its concern for surging bills, that if the wholesale market remains unchanged over the next year, the change in methodology brought in by Ofgem should result in lower bills over the second half of 2023 that previously forecast.
The updated analysis comes after Investec’s Martin Young similarly suggested the change to price cap methodology along with the continued volatility in the wholesale market will push the price cap over £4,200 come January.
“The cost-of-living crisis is already having a devastating impact on people’s lives. Every day we hear from people who can’t afford to turn the lights on or cook their kids a hot meal,” said Morgan Wild, head of policy for Citizens Advice.
“The government did the right thing by bringing in targeted support, but it won’t be enough for people to manage these previously unthinkable price hikes. The obvious place to start is to increase benefits to keep pace with the cost of living. There’s no time to waste.”