Energy price cap rethink sparks fears of higher bills

Energy illo

Ofgem has opened the door to a major relaxation of energy price cap rules which would expose millions of households to the risk of sudden price increases.

The regulator signalled it was considering a review of how the energy price cap works after turmoil in the industry triggered by a surge in wholesale prices.

The cap prevents energy companies from immediately passing on higher costs to their customers, forcing many suppliers to the brink of bankruptcy.

Several companies have pushed for a review of the cap, arguing they cannot survive a six-fold rise in wholesale gas prices and four-fold rise in wholesale power prices without being able to pass on more to their customers.

The cap's level is only reviewed twice a year. However, Ofgem is understood to have ruled nothing out in a review of the cap, including how it is calculated and how frequently it can be adjusted.

Jonathan Brearley, Ofgem chief executive, told trade body Energy UK’s industry conference: "Although the gas price rise is unprecedented today, we will need to plan on the basis that shocks like this could happen again."

Introduced by Theresa May’s government in 2019, the price cap applies to suppliers’ default energy bills and covers about 15m households.

Reflecting higher wholesale gas and power costs, the level went up by £139 on October 1 to push average bills up by £1,277.

It is expected to go up again when it is recalculated in April and experts at Cornwall Insight estimate it could climb by almost £400.

One industry source suggested increasing the frequency with which the price cap is calculated was the “bare minimum” regulators and politicians could do to help suppliers.

Any attempt to calculate it more frequently is likely to face fierce resistance, however, given it is likely to bring forward the hit to household budgets at a time of wider inflation.

Suggestions of a change in how frequently the cap is calculated faced opposition from the Department for Business, Energy and Industrial Strategy.

A source said that Kwasi Kwarteng, the Business Secretary, would resist any attempt to change how often the cap would be adjusted, raising the spectre of a row between the regulator and ministers.

Governments across Europe are under pressure to help households and businesses from rising wholesale costs, with France introducing a "price shield".

It comes amid pressure from Britain on Angela Merkel to resist being strong-armed by Russia over the start-up of the Nord Stream 2 pipeline.

The Kremlin has said putting the pipeline into operation would lower rapidly rising gas prices in Europe in a bid to pressure Mrs Merkel to speed up a regulator’s decision.

Alexander Novak, the Russian deputy prime minister, said on Wednesday: “I think there are two factors, which could somewhat cool off the current situation. First of all, of course, this is, definitely, completion of certification and the fastest clearance for gas supplies via the completed Nord Stream 2.”

While government officials have been cautious not to make it look like Russia is blackmailing Europe with its new pipeline, Vladimir Zhabarov, a member of Russia's upper house, put it bluntly on Thursday: "Nord Stream 2 could be operational as early as this year, otherwise Europe is going to freeze."

Timothy Ash, a senior strategist at Bluebay Asset Management, said it marked the “first time since the Cold War that Russia has been able to manipulate European markets to get what it wants. This is Europe on its knees. It has no other way to cover its energy needs. Putin played Europe like a fiddle.”

Gazprom and the Kremlin have repeatedly insisted Russia has been supplying its customers with gas in accordance with existing contracts.

Russia is Europe’s largest supplier of gas, accounting for 43pc of the EU's imports last year.

Britain is trying to cut its reliance on fossil fuels. Mr Kwarteng confirmed government plans to decarbonise the UK’s electricity system by 2035 - 15 years earlier than planned - with a ramp up of wind and solar power as well as at least one nuclear plant.

Gas-fired power plants will still be part of the mix, however, as long as they are coupled with carbon capture technology.

Publishing its winter outlook for the electricity market, National Grid’s electricity system operator said it expects supply will more than meet demand, albeit it warned of high costs to bring on supplies at short notice. National Grid said it also expects gas markets to balance.

Additional reporting by James Crisp, Nataliya Vasilyeva in Moscow, Justin Huggler in Berlin and Joe Barnes in Brussels