Ofgem confirms move to quarterly price cap

Ofgem has confirmed the price cap will from now on be updated every three months in a bid to bolster market stability following a year of spiralling wholesale energy costs.

The regulator made a series of announcements on Thursday (4 August) in which it also confirmed its decision to extend the cap until the end of 2023.

By updating the cap quarterly, rather than every six months, Ofgem believes the risk of further large-scale supplier failures will be reduced.

Ofgem argued that the change will ensure any cost reductions are passed on more quickly to consumers. However, the latest forecasts suggest the price cap is set to increase for the next three quarters, peaking at more than £3,700 in the second quarter of 2023.

Meanwhile, the regulator has published the outcome of its 2022 review into whether competition in the market is sufficient to remove the cap altogether. The review said the three following conditions would need be fulfilled for this to happen:

• Structural changes from government, Ofgem and the wider market are facilitating competition
• The competitive process could be expected to work well in the absence of the price cap
• Competition is delivering fair outcomes for consumers

On the first condition, Ofgem said the smart meter rollout has “not progressed sufficiently to have a material impact on competition”, whilst it is too early to assess the impact of the new Central Switching Service, which went live last month and provides a single dual fuel switching process for gas and electricity.

With regards to the second condition, Ofgem said a survey found insufficient numbers of customers are engaging with the market and consequently, the regulator does not see any evidence that removing the cap would not lead to unfair pricing for such consumers.

It said this lack of engagement is partly the result of supplier exits. During 2021, the number of active suppliers halved, from 52 to 26, which resulted in the combined market share of large suppliers in the electricity market increasing from 81% to 91%.

“The exit of many smaller suppliers has also resulted in a substantial increase in the proportion of consumers who say they would only consider switching to a large or well-known supplier,” Ofgem explained.

And on the third condition, Ofgem found consumers are not benefiting from competition due to limited choice driven by wholesale market volatility, with supplier exits reducing the number of tariffs available by more than 60%. Meanwhile, overall customer satisfaction has been falling since Q2 2020 and is now at its lowest level since 2018. While satisfaction rates have dropped for all categories of suppliers, they fell most steeply for medium suppliers.

Ofgem’s review found the competitive process would not adequately protect consumers in the absence of the cap and it has therefore decided to keep the cap in place until the end of the next year.

Under current regulations this is the final review into the price cap, although the government’s Energy Security Bill does have the option of extending the cap beyond the end of 2023 when they expire.

Jonathan Brearley, Ofgem’s chief executive, said: “I know this situation is deeply worrying for many people. As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably.

“The trade-offs we need to make on behalf of consumers are extremely difficult and there are simply no easy answers right now. Today’s changes ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also, that it can adapt to the current volatile market.

“We will keep working closely with the government, consumer groups and with energy companies on what further support can be provided to help with these higher prices.”

“Misery and huge anxiety”

News of the move to a quarterly cap has been met with concern from charities involved with the sector, with worries about faster increases to bills during the winter.

Peter Smith, director of policy and advocacy at National Energy Action (NEA), said passing price cap changes on to households quarterly rather than every six months, “wasn’t necessary” and means “further significant price increases in January are inevitable”.

Smith added: “Average annual bills are already predicted to increase by £1,200 a year – a 177% increase since last October. Now, householders can expect further hikes just after Christmas, in the middle of heating season when energy costs are typically at their highest.

“January is also usually a time of increased mental health problems and further hikes in bills will sadly lead to increased misery and huge anxiety for energy consumers across Great Britain, particularly for the poorest households.

“It’s disappointing that Ofgem has not listened to these concerns. They could have used their discretion to offset this avoidable outcome by starting the reforms in April when energy demand starts to fall.”

Gillian Cooper, head of energy policy at Citizens Advice, said: “With the cost of energy only going in one direction right now, many will be worried by the idea of seeing even more frequent price changes.

“Something that’s added to all our bills is the cost of supplier failures. Changing to a quarterly price cap should limit the risk of any more suppliers going bust, which is a good thing. But our bills are already incredibly high and still rising.

“The government was right to bring in financial support for people, but it may not be enough to keep many families afloat. It must be ready to act again before winter draws in.

“Ofgem must make sure suppliers are helping customers who are struggling to pay. It should hold energy companies to account so people aren’t chased by debt collectors or pushed onto prepayment meters when they can’t keep up with bills.”

This topic will be discussed in more detail at Utility Week Forum this November. For more information and to book your place, see our website.