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Ofgem to consult on setting the price cap quarterly

Currently the price cap is reset every April and October. Image: Getty.

Currently the price cap is reset every April and October. Image: Getty.

Ofgem has launched a consultation into whether the default tariff price cap should be set every three months, instead of every six.

The ‘minded-to’ consultation comes after record high power prices during the beginning of 2022 led to the price cap jumping 54% in April to £1,971, squeezing consumers.

“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,” said Jonathan Brearley, CEO of Ofgem.

“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.”

In addition to making the price cap quarterly, Ofgem is proposing a small reduction in the notice suppliers get of the level of the price cap and an update of the wholesale allowance so that suppliers can recover backwardation costs – those accrued when the current price of an underlying asset is higher than prices trading in the futures market – in a reasonable period of time.

Following the statutory consultation, which is running till 14 June, the regulator could bring in the new quarterly price cap structure from October.

Simon Oscroft co-founder of supplier So Energy said the review was a positive step in reforming the retail market following the volatility seen through the end of 2021 and into 2022.

“The current bi-yearly cap review leaves customers with huge bill shocks and suppliers exposed to significant volume risks which add cost to all customers. However, even a quarterly cap still exposes suppliers to significant risk and the cost of this ends up on customer bills. Moving to a relative price cap would help reduce risk and cost over the medium term for customers at the same time as ensuring loyalty is not penalised.”

In 2021, 27 suppliers collapsed and Bulb entered special administration, and over the first few months of this year Whoop Energy, Xcel Power Ltd and Together Energy shuttered. The companies’ customers have largely been placed into the Supplier of Last Resort mechanism, which as of December 2021, was already expected to cost £2.4 billion, according to analysis from Cornwall Insight. This alone equates to an increase in bills of £90 per household.

The proposed change to the price cap is the latest in a number of changes announced by Ofgem in light of the collapses, including financial stress tests. Additionally, supplier boards are now required to undertake self-assessments of their management control frameworks and the regulator is consulting on new financial licence requirements.

But while some have welcomed the consultation, others have highlighted that changing the price cap in the middle of the winter period could further strain consumers.

"The changes significantly reduce the current protection the price cap affords all consumers over winter and opens the door to significant price rises during the coldest months of the year,” said Peter Smith, director of policy and advocacy at fuel poverty charity National Energy Action.

“In the short term at least, the changes will be particularly damaging for the poorest households; removing the certainty of the price they will pay over winter. This could cause further immense financial strain and damaging health and well-being as prices soar every few months.”

The increase in bills in April is expected to push 6.3 million households into fuel stress. But while wholesale gas prices have fallen from their highs in March, consequently reducing power prices too, a significant jump in the price cap is still expected for the winter period, with recent research from Cornwall Insight suggesting it could hit £2595.19.

In February, Chancellor Rishi Sunak unveiled three key measures to help support consumers, including a one-off repayable £200 loan, a £150 council tax rebate and a discretionary fund. But there have been repeated calls for the government to go further, in particular as short-term measures were largely absent from both the British Energy Security Strategy and the Energy Security Bill.

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