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Ofgem backs consumers with price cap update

Posted: Mon May 16, 2022 10:41 am
by AngelaE
[Published Monday 16 May] Ofgem has published a ‘minded-to’ consultation to look at whether the energy price cap should be updated quarterly rather than every six months. At a time when consumers are being squeezed financially from all sides, Ofgem is looking at how it can use its powers to make the market fairer and more resilient.

A more frequent price cap would reflect the most up to date and accurate energy prices and mean when prices fall from the current record highs, customers would see the benefit much sooner.

This change would also help energy suppliers more accurately predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures which ultimately push up costs for consumers.

Jonathan Brearley, CEO of Ofgem, said:

“Our top priority is to protect consumers by ensuring a fair and resilient energy market that works for everyone. Our retail reforms will ensure that consumers are paying a fair price for their energy while ensuring resilience across the sector.

“Today’s proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers. It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers.

“The last year has shown that we need to make changes to the price cap so that suppliers are better able to manage risks in these unprecedented market conditions.”

What is being proposed:

The price cap level/price would change every three months instead of every six months.

A small reduction in the amount of notice suppliers get of the new price cap level.

Updating the wholesale allowance to ensure that suppliers can recover backwardation costs in a reasonable period of time. Backwardation is when the current price of an underlying asset is higher than prices trading in the futures market.

The current method means that consumers are not able to reap the benefits of falling gas prices quickly enough. Experts at energy regulator Ofgem have been working hard to develop this update using extensive stakeholder feedback, by talking to consumers, modelling different options and scenarios and by using the insights from the previous consultation: Consultation on Medium Term Changes to the Price Cap Methodology | Ofgem

The high prices and volatility in the wholesale market have placed a significant strain on the sector. The changes being proposed would also enable suppliers to recover their costs and deliver better outcomes for consumers.

This statutory consultation would allow Ofgem to bring in the changes from October and support the sector through a potentially challenging winter.

This is all part of a range of plans to make the market fairer and more resilient, such as stress tests for suppliers and a more robust scrutiny of supplier business plans. Ofgem also recently wrote to suppliers to alert them to a series of market compliance reviews to ensure, amongst other things, that they are handling direct debits fairly, and that overall, they are held to higher standards for performance on customer service and protecting vulnerable customers.

Notes to editors
The consultation is open until Tuesday 14 June 2022. We would be looking to implement these reforms from October 2022.