Ofgem proposes more frequent changes to Britain’s energy price cap

Britain’s energy regulator sought to address growing concern over soaring electricity and gas bills by announcing a package of proposed reforms on Friday, including quarterly changes to the energy price cap.

The move by Ofgem, which has come under criticism for its handling of the energy crisis, came after it announced a sharp rise in the cap on Thursday that will push up bills for at least 22mn households by 54 per cent.

The regulator currently adjusts the cap twice a year but wants to do so more regularly to ensure changes in wholesale prices are passed on to households more quickly, which it said should help reduce the big swings in prices consumers are facing this year.

Ofgem warned that the volatility in the wholesale gas market, which has driven energy costs higher, was “not over” and called on suppliers to ensure they were “continuing to manage risks to avoid further financial distress and potential insolvencies”.

More than half of all energy suppliers — 28 companies — have gone bust since August as wholesale prices surged, adding to the rise in bills, which include a levy to cover the costs of transferring affected customers to new suppliers.

The regulator said it was also planning to adjust the formula used to calculate the cap to ensure that it better reflected the costs of supplying energy, “as well as decisions in response to the recent wholesale market volatility and to allow the cap to respond flexibly to exceptional or unprecedented market changes in the future”.

The formula includes wholesale energy prices, energy suppliers’ network costs and costs of government policies such as renewable power subsidies.

But Miriam Brett, director of research and advocacy at Common Wealth think-tank, said updating the energy price cap more frequently would not tackle the “systemic failures designed into our energy market and could see households left more exposed to market fluctuations”.

Ofgem’s intervention, which it flagged in November, came as anti-poverty campaign groups warned of the impact of the sharp jump in bills on the most vulnerable households. The cap will rise by £693 to £1,971 a year from April 1, based on average usage, and a further big jump is expected when the cap is next due to be reset in October.

UK chancellor Rishi Sunak unveiled £9bn in measures to try to mitigate the price increase on Thursday, including a £150 rebate on council tax for most households in England in April and a £200 universal discount off bills in October, which will be clawed back in instalments over five years.

The cap was introduced by Ofgem in 2019 at the request of the government to try to keep a lid on energy bills. Suppliers have complained that the twice yearly adjustments — in April and October — mean they have been unable to pass on the sharp increases in wholesale gas prices in recent months.

Energy UK, which represents suppliers including Centrica, Eon UK, EDF and Scottish Power, welcomed the proposed changes, adding the “unprecedented situation in recent months has highlighted some issues with the way the current price cap operates”.

The regulator said it would also strengthen requirements for new entrants to the market. Many of the suppliers that have gone bust were poorly capitalised and did not have long-term energy gas contracts, or hedges, in place.

Citizens Advice has previously accused Ofgem of allowing “unfit and unsustainable energy companies to trade with little penalty”.