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Ofgem opens consultation into price cap as high power prices continue to squeeze suppliers

Power prices have increased by over 250% over the past year, but suppliers cannot pass all of this cost onto consumers, as they are protected by the price cap. Image: Getty.

Power prices have increased by over 250% over the past year, but suppliers cannot pass all of this cost onto consumers, as they are protected by the price cap. Image: Getty.

Ofgem is to consult on the energy price cap, as suppliers continue to falter amidst record high power prices.

On Friday (19 November), the regulator opened five consultations on its proposals to ensure that the price cap reflects the costs, risks and uncertainties facing energy suppliers.

This includes a consultation on the potential impact of increased wholesale volatility on the default tariff cap. It will consider whether recent market volatility means that the level of the price cap has materially departed from the efficient cost level allowed within the price cap.

Ofgem’s consultation follows a slew of energy company collapses in recent months, with many pointing to the impact of the price cap combined with high power prices.

For example, Bulb – which announced today that it was entering special administration – wrote in a blog that “the rising energy crisis in the UK and around the world has concerned investors who can’t go ahead while wholesale prices are so high and the price cap—designed to protect customers—currently means suppliers provide energy at a significant loss.”

The second consultation opened by Ofgem will look at the process for updating the default tariff cap methodology and setting maximum charges. This will set out proposals to modify the regulators licence to amend the cap outside of the routine six month cycle in exceptional circumstances.

Third, Ofgem is consulting on the true-up process for COVID-19, building on its previous findings that the pandemic had resulted in additional material costs for credit meter default tariff customers.

Next it is consulting on reflecting end user categories in the default tariff cap, to allow for a more appropriate reflection of efficient costs.

Finally, it is consulting on the impact of the energy company obligation scheme allowance methodology on the default tariff cap. This scheme is yet to be approved by Parliament.

The deadline for these consultations is 17 December 2021, with Ofgem planning to publish all its decisions by the beginning of February 2022, except for the COVID-19 consultation, which will be published by the beginning of August 2022.

Ofgem initially announced it would consult on the price cap methodology at the end of October, following the regulator’s chief executive Jonathan Brearley stating that there was a need for Ofgem to “regulate the energy market differently” as an increasing number of suppliers collapsed.

The price cap is currently set at £1,277 for default tariffs and £1,309 for prepayment customers. Ofgem sets the tariff every six months, and announced the current rate – which was a significant jump on the previous period due to increasing power prices – in August, ahead of it coming into force in October.

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