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Ofgem eyes changes to price cap amid energy crisis

·3-min read
Increased global demand has pushed up the price of gas across the world (Steve Parsons/PA) (PA Wire)
Increased global demand has pushed up the price of gas across the world (Steve Parsons/PA) (PA Wire)

The energy regulator might change the way it caps bills for millions of households across Britain as a major spike in gas prices drives suppliers to failure.

Ofgem has given no details of what adjustments it might make to how the cap is calculated, but will set out its thinking as it launches a consultation next month.

Energy bosses have been calling for a rethink of the price cap model amid the gas price crisis.

At the moment the regulator caps the energy bills of more than 14 million households at £1,277 per year on average.

But a fivefold increase in the price of gas has been so rapid that suppliers are now having to pay more for energy than the cap forces them to sell it for.

Ofgem said in a letter to suppliers on Friday: “The unprecedented rise in energy prices this year has changed the perception of risk and uncertainty in this market.

“In order to protect the interests of consumers, we must ensure that the regulatory frameworks, including the price cap, fully reflect the costs, risks and uncertainties facing the supply companies we regulate.”

The consultation on potential changes will end in February, and they could be implemented at the beginning of April, when the price cap is set to change.

Even before potential changes, experts at analysts Cornwall Insight predict that energy bills will rocket to £1,660 per year for price cap customers.

The regulator also said it plans to make changes to the supplier of last resort scheme, which steps in if a supplier fails.

When a supplier goes bust, which has happened more than a dozen times in the last two months, Ofgem appoints a new company to take over its customers.

This gives customers certainty that they can continue to use their gas and electricity as usual. However it is often an expensive process for the chosen new supplier.

In order to incentivise companies to volunteer, Ofgem allows them to claim back some of these expenses from the rest of the industry – a cost that is ultimately passed on to all bill-payers in Great Britain.

The watchdog said it plans to expedite the process so suppliers do not have to wait for as long to claim expenses back.

In the wide-ranging letter, Ofgem also said it intends to raise the bar for what it expects from suppliers’ risk management processes and potentially change conditions in their licences.

And it plans to change the frequency at which suppliers have to pay a green charge known as the renewables obligation.

At the moment it is paid once a year, in the autumn. But the big charge has often been enough to push struggling suppliers into failure while they still owe large sums to the regulator.

ScottishPower chief executive Keith Anderson said: “The current crisis has exposed real weaknesses in how the energy retail industry is regulated. Irresponsible and reckless behaviours have gone unpunished and now customers are being told to bear the costs.

“And as I said last week, things are becoming desperate even for some well-run companies in our sector. Many more will go bust in the next few weeks.

“I am pleased that Ofgem has begun to listen to the industry and to respond. As a set of short-term fixes, Ofgem’s proposals make sense.

“But we also need to think about the bigger picture. We need urgently to address the structural failures in the retail market – reforming the price cap so that it can respond more quickly to price shocks in the wholesale energy markets as well as focusing it on the most vulnerable customers, who will need our help the most.”

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