Ofgem has published a new consultation to look at whether the energy price cap should be updated quarterly rather than every six months.
Ofgem says a more frequent price cap would reflect the most up to date and accurate energy prices and mean that when prices fall from the current record highs, customers would see the benefit much sooner.
Discussing the reasons behind the new proposals, Ofgem said that under the current method consumers are not able to reap the benefits of falling gas prices quickly enough.
The UK’s energy regulator added that the 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.
This statutory consultation would allow Ofgem to bring in the changes from October and support the sector through a potentially challenging winter.
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.
Why are commercial energy prices continuing to rise?
Ofgem says high prices and volatility in the wholesale market have placed a significant strain on the sector.
Several factors have contributed to rising energy prices, including higher global demand and lower solar and wind energy output.
Dermot Nolan, former Ofgem chief executive, said the increases were exacerbated by depleted stocks following a cold winter last winter, reduced supply from Russia, and increased demand for liquefied natural gas from the Far East.
How will the new proposals affect your business’s energy prices?
Although Ofgem says the changes mean that customers would benefit when energy prices fall, other industry experts have raised concerns about the frequency of potential increases to customers’ bills.
Justina Miltienyte, head of policy at Uswitch.com said: “Updating the price cap on a quarterly basis would mean a second update hot on the heels of October’s expected increase in rates.
“This could demand a swift revision to household budgets at one of the most expensive times of year, raising the possibility of a painful New Year hangover.
“Until now, the price cap has at best acted as a delay mechanism for the pain of rising wholesale prices, but it is unable to prevent harsh increases hitting customers altogether. A quarterly review means that the ability of the cap to delay the pain of rising prices is shorter.
“The price cap has always been a sticking plaster to deal with the problems of the energy market, and this proposed change is another attempted quick fix. The cap fails to give real, meaningful help to those who need it the most and this has been brought into extreme focus as costs have rocketed. More fundamental longer-term reform is still needed.”
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