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Has the energy price cap had its day?

<span>Photograph: Frode Koppang/Alamy</span>
Photograph: Frode Koppang/Alamy

Next weekend, Britain will experience its first August bank holiday unencumbered by Covid for three years. Notting Hill carnival will explode on to the streets of west London, Manchester will host Pride celebrations and a vintage steam rally should charm the punters near Looe in Cornwall.

But a nasty prelude threatens to puncture the nation’s mood before the festivities kick off: Friday’s energy price cap announcement. The energy regulator Ofgem is poised to update the public on the new level for the cap, which will be implemented on 1 October. Annual bills are currently capped at £1,971 and this is forecast to hit £3,582 in the autumn, a prediction which has been raised several times since the record summer cap was introduced in April.

The government is examining a suite of options to help consumers, and in particular vulnerable households, tackle rising costs. These include suggestions that the price cap may be frozen for a fixed period.

This week could also mark the beginning of the end for the cap, which has proved a divisive policy blamed for the collapse of nearly 30 suppliers during the energy crisis – most notably Bulb, which remains in government-backed administration.

The cap traces its roots to a Labour conference speech by then leader Ed Miliband in 2013, when he promised to impose a 20-month freeze on energy prices if elected. Despite Miliband being ridiculed, Theresa May’s government implemented the cap in 2019 in an effort to crack down on perceived profiteering in the energy industry.

“It was introduced to stop what ministers saw as gouging of loyal customers – whether that was happening, who knows, but that was the reason for its creation,” says Robert Buckley of consultancy Cornwall Insight. “It has forced all consumers to become exposed to these huge rises in energy bills.”

However, the existing legislation, which allows the cap to be extended annually, expires next year and many believe that the policy is now on borrowed time.

“The cap is not fit for purpose,” says Buckley. “It forces suppliers to all hedge in the same way or lose their licence. So if their hedging costs are higher than the cap, they cannot pass that on to customers. You scrap the cap and still protect the most vulnerable.”

Efforts to revamp the cap have proved divisive. Ofgem has modified the way it is calculated and moved from announcing a new cap every six months to every quarter.

This week also brings unfortunately timed interim results from Harbour Energy, one of the biggest producers in the North Sea

However, it has been caught between the twin aims of protecting consumers and ensuring more suppliers do not collapse. This tension led to the dramatic resignation last week of an Ofgem non-executive, Christine Farnish, who argued the regulator was favouring businesses at the expense of consumers.

Many suppliers without long-term hedging policies found themselves pushed into making huge losses, unable to pass on increased costs to customers above the cap. This problem persists for Bulb, which has about 1.6 million customers: the government has prevented the company from hedging the cost of fuel, exposing it to the huge price rises in the wholesale gas market seen since Russia’s invasion of Ukraine.

This week also brings unfortunately timed interim results from Harbour Energy, one of the biggest oil and gas producers in the North Sea. Each booming financial update from rivals such as BP and Shell has been greeted with a torrent of condemnation this year, as energy companies profit while the public faces a cost of living crisis.

London-listed Harbour is expected to publish an upbeat update, with analysts at Jefferies forecasting free cashflow of $891m (£752m) for the first six months of the year.

The company has been among the hardest hit by the oil windfall tax as recent investments, including the Tolmount gas field off the Yorkshire coast, are just bearing fruit. It has also claimed that its hedging policy has meant it has not yet felt the full effects of high energy prices. Analysts at Stifel estimate the energy profits levy will cost Harbour an extra £1.1bn over the next three years.

However, the company has already committed itself to rewarding shareholders with $200m in dividends and the same again in share buybacks. Doling out further goodies to investors, hours before a doom-laden price cap announcement, could incite further public fury.