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Price cap could jump to £2,800 warns Ofgem’s Brearley

The price cap jumped to £1,971 in April, from £1,277. Image: Pixabay.

The price cap jumped to £1,971 in April, from £1,277. Image: Pixabay.

The Default Tariff Price Cap could jump in October to £2,800, Ofgem CEO Jonathan Brearley has told MPs.

Speaking to the Department of Business, Energy and Industrial Strategy (BEIS) Select Committee, Brearley said he will be writing to the Chancellor today (24 May) to give provide him with latest estimates of the price cap uplift.

“The first thing I've got to say is I'm afraid that conditions have worsened in the global gas market,” Brearley told the committee.

“With Russia's invasion, gas prices are higher and highly volatile. At times, they've now reached over 10 times the normal level.

“Now, I know this is a very distressing time for customers. But I do need to be clear with this committee, with customers and with the government, about the likely price implications for October.”

The predicted rise follows the price cap for the summer period jumping by 54% in April due to high gas prices over the winter. Volatility and high prices have continued since, with analysts like Cornwall Insight having repeatedly predicted substantial jumps in the price cap in October.

Ofgem is currently estimating £1.3 billion in bad debt for the year, the select committee heard, as consumers struggle with surging prices. The increase in bills in April alone is expected to push 6.3 million households into fuel stress.

As well as driving up bills, surging wholesale gas and power prices led to substantial market volatility over the last nine months. 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.

Criticism was launched against some of these suppliers, for failing to sufficiently hedge and selling power at below market rates, this left them vulnerable to surging power prices towards the end of 2021 and into the beginning of 2022 as gas prices hit record highs

Going forwards, Ofgem will focus on three key areas of reform to address the economic model that allowed low capitalised companies to enter the market, Brearley told the Select Committee. These build on the financial stress-tests and self-assessments of their management control frameworks, announced by the regulator in December and brought into action in January.

The three key areas of reform include ring-fencing customer credit balances, introducing top-down financial regulation that will see Ofgem intervene if companies do not have the right governance and risk management behind them, and adapting the price cap to allow suppliers to react to the more volatile price environment.

This final point includes plans for the price cap to be set quarterly, rather than twice a year. Ofgem announced a consultation into such a change last week (16 May), however some expressed concern that far from allowing bills to fall more quickly, a mid-winter increase would push up consumer bills further.

Speaking today, Brearley said that while it was possible prices would go up again over winter under the new price cap regime, it could also go down given the wide range of factors contributing to volatility currently. But he urged companies to hedge, saying given the uncertainty it was the best thing to do.

He continued to state that through these reforms, Ofgem can become proactive rather than reactive, but that no regime can fully protect against failure.

When asked if Ofgem can maintain a safe level of competition in the market with all of that added regulatory burden by BEIS Select Committee chair Darren Jones MP, Brearley said the framework that is brought into place to meet the volatility of the market currently must not be a one-off change, but something that adapts over time to provide greater resilience but without reducing competition.

“What we don't want to do as they describe the swing of the pendulum the other way [is to] over regulate the sector and drive out any innovative entrant and prevent entrants coming into the market,” he said. “But I'm confident we can do both.”

Other moves brought in by Ofgem to help manage the market volatility, include the controversial Market Stabilisation Charge, which was brought in in February but has yet to be triggered.

Industry bodies and charities are continuing to call for further support from government following Brearley price cap rise predication, building on Chancellor Rishi three short-term support measures announced in February, as well as details of building long-term resilience set out in the British Energy Security Strategy and the Energy Bill.

“The situation is critical. Already we are seeing people having to skip meals, turn off the heating or struggling to pay for life-saving medical equipment - this devastating energy price cap rise will see millions of households fall deeper into poverty and push many more below the breadline,” Dr Nina Skorupska CBE, Chief Executive of the Association for Renewable Energy and Clean Technology (REA), said.

“The Government has a moral and economic imperative to intervene with a substantial package to relieve pressure on energy bills. VAT on energy bills should be suspended and the Warm Homes Discount must be expanded, both in terms of value and eligibility. ‘Green’ levies also would be more appropriately sourced from general taxation.”

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