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Price cap could jump 46% as consumers take on cost of supplier exits

Consumers will have to absorb the growing wholesale prices as well as the cost of supplier exits. Image: Getty.

Consumers will have to absorb the growing wholesale prices as well as the cost of supplier exits. Image: Getty.

The price cap could jump 46% for summer 2022, hitting approximately £1,865 as wholesale power prices remain high.

Currently, the winter 2021-22 cap is set at £1,277 per annum – which is itself a record high – but could increase by almost 50% when the new cap is set by Ofgem in February 2022, according to new analysis from Cornwall Insight.

Wholesale power prices have surged beyond the records seen in October already, as the ongoing supply concerns for electricity and gas continue. These are also influenced by geopolitical pressures which are impacting the entire European gas market, as well as colder weather driving up demand.

Additionally, the cost of supplier collapses will impact the price cap, as the total cost of suppliers being absorbed into the Supplier of Last Resort (SoLR) regime is passed onto consumers. Cornwall Insight puts that cost at approximately £2.4 billion, based on the assumption that suppliers will have had to purchase additional gas and electricity at wholesale prices to accommodate the new customers they have taken on through the regime.

This equates to an increase of £90 per household to cover the cost of supplier collapses, assuming 27 million customers can cover the sum.

Cornwall Insight’s forecasts for summer 2022 and winter 2022-23 already include a c. £30 per annum cost from the collapse of former suppliers, based on indicative 2022-23 charging statements from the gas distribution operators as well as its own assessment of the impact of mutualisation of the Renewable Obligation scheme.

The rest of the £90 will be crystallised within the coming months, as charging statements from energy network companies are released, but the research group expects it to be around £60.

Default tariffs, actual and predicted. Image: Cornwall Insight.
Default tariffs, actual and predicted. Image: Cornwall Insight.

In November, Ofgem announced it is to consult on the energy price cap, given the slew of supplier exits. At the time of writing, 27 suppliers have collapsed, including 25 since gas prices began to truly spike from August.

This includes; Zog Energy, Orbit Energy, Entice Energy, Bulb, Social Energy Supply, Neon Reef, Omni Energy, MA Energy, Zebra Power, Ampoweruk, CNG Energy (electricity and gas), Bluegreen Energy Services, Goto Energy, Pure Planet, Colorado Energy, Daligas, ENSTROGA, Igloo Energy, Symbio Energy, Hub Energy, Green Network Energy, Simplicity Energy, Avro Energy, Green Supplier, Utility Point, People’s Energy, PfP Energy, MoneyPlus Energy and Hub Energy.

All but Bulb have entered into the SoLR regime, and their customers taken on by other suppliers. Bulb was deemed too big for this, and has instead entered into special administration.

“With Ofgem examining a wide range of potential reforms to both the cap and the way in which the costs associated with supplier failures are recovered, we note that there is still a large amount of uncertainty relating to the level and structure of the cap,” said Dr Craig Lowrey, senior consultant at Cornwall Insight.

“However, with the energy supply sector still dealing with the exit of more than two dozen companies in a matter of weeks, the need to ensure resilience across the entire market is evident. Furthermore, it is not solely domestic customers that are dealing with these new highs in energy costs, as businesses will face their own set of challenges without the protection afforded by the default tariff price cap.”

On top of revisiting the price cap methodology, Ofgem has set out a raft of new measures to ensure the financial stability of suppliers, including financial stress testing.

Beyond the summer, Cornwall Insight is currently forecasting the winter 2022-23 default tariff price cap to hit £2,240 per annum.

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