Energy regulator could alter price cap in rare circumstances

The alterations would allow the regulator to adjust the cap more than twice a year if urgent action was required.

It comes after over 20 energy suppliers have collapsed in 2021, with several highlighting how the energy price cap made it impossible for them to carry on trading.

The consultation closes on 17 December 2021 and Ofgem will publish their next steps in February 2022.

Credit: chrisdorney/Shutterstock.com

Consultation

This consultation is one of five opened by Ofgem and looks at what should happen when exceptional circumstances hit the energy market.

They suggest adding a mechanism to the energy price cap to allow them to raise the cap during its six-month cycle.

Currently, the cap is only reassessed twice a year and a fresh cap level comes into force in April and October.

Ofgem's proposed changes would give them the power to alter the cap at any time of year in exceptional circumstances.

This would only happen if two tests were met:

1. An event would need to be rare and unforeseeable
2. An event would have a high impact on the energy market without urgent action

In their consultation documents, Ofgem say the Covid-19 pandemic and the recent spike in wholesale gas prices would both be considered as rare events under their proposed test.

However, anything that suppliers could have reasonably prepared for such as smaller spikes in wholesale prices would not count as exceptional circumstances.

Criticism

Ofgem has been criticised by several failed suppliers in recent months as energy providers found themselves charging less for energy than they were paying for it on the open market.

When Utility Point collapsed in September, they said the level of the cap was set £200 below the costs of supplying energy, making the market unsustainable.

Igloo Energy were also critical of the cap when they collapsed later that same month, pointing out the energy price cap was designed to favour large suppliers and the regulator had resisted pressure from smaller firms to review how the cap is calculated.

The price cap puts a limit on how much an energy supplier can charge per unit of electricity and gas, with the headline figure saying how much a typical household can expect to pay.

The most recent change to the energy price cap came in October 2021 when the threshold was raised by £139 to £1,277.

It is set to reassessed early in 2022 and the next cap will come into force in April 2022. Customers have already been told to expect another large increase.

What about customers?

Ofgem is finally reacting to the concerns of failed suppliers and others in the energy sector who have warned the current system is unsustainable.

From a supplier's perspective, it means the regulator can react quickly to unprecedented circumstances such as the global spike in gas prices that have helped to squeeze many providers out of the market in the last few months.

Ofgem don't want more suppliers to collapse and they don't want further instability in the energy market - being able to adjust the cap mid-cycle would help with that.

Yet the idea of the regulator being able to adjust prices mid-cycle doesn't necessarily benefit customers who could see their bills rising multiple times in a six-month period.

Part of the justification for introducing the price cap in 2019 was to prevent households seeing huge hikes in their bills if they were on a standard variable tariff (SVT).

It provides certainty for SVT customers that their bills will only increase a maximum of twice a year. If Ofgem shift the goalposts to adjust the cap whenever there are exceptional circumstances, this may remove some of the key benefits of the cap.

Theoretically, of course, the adjustment could go either way and customers could see their bills fall mid-cycle if Ofgem judge the cap is out of step with the costs of supplying energy.

But the coronavirus outbreak and wholesale gas prices have demonstrated that many energy suppliers are vulnerable to sudden shocks in the market and it seems far more likely they would be able to successfully argue against a mid-cycle cap reduction in favour of the customer.

Ofgem will now listen to suppliers, consumer groups and other stakeholders to see what they think of the proposals.

It's become clear in the last few months that changes need to be made to stop millions of customers being displaced when their energy supplier collapses, yet it remains to be seen whether this is the most effective way of protecting consumers.