Pressure mounts on government to scrap price cap

There is mounting pressure on the government to scrap the energy price cap following the latest update from the regulator, with more suppliers saying it is no longer fit for purpose.

In an announcement on Friday (25 August) Ofgem revealed that the cap will be set at an annual level of £1,923 for a dual fuel household paying by direct debit based on the current typical domestic consumption values (TDCVs) rate, taking the cap to its lowest level since October 2021.

Ofgem is introducing new TDCVs from 1 October, when price cap levels and typical bills will be expressed in 2023 TDCVs of 2,700 kWh of electricity, 11,500 kWh of gas and 3,900 kWh of electricity for Economy 7.

Using these new TDCVs the direct debit cap falls further still to £1,834 in October. Ofgem is expected to make a further announcement on the cap level to reflect the new values on 1 October.

Despite the cap decreasing, major concerns have been raised from energy suppliers, trade bodies and consumer charities, with many urging the government to introduce more targeted support measures for those in need – a key ask of Utility Week’s ongoing Action on Bills Campaign.

One retailer, 100Green (formerly Green Energy UK), has called for the cap to be scrapped entirely.

Doug Stewart, 100Green’s chief executive, said: “The price cap was designed as a temporary intervention to prevent price gouging by some suppliers.

“But it has now remained in place for too long and become the ‘de-facto price’, meaning the government, through their regulator Ofgem, is effectively setting prices, not capping them.

“In a volatile wholesale market, the price cap demonstrates the futility of trying to stop the international tide of rising prices and should not be government policy.

“The price cap was devised at a time of benign wholesale prices and was never intended to cope with the disruption to the world markets brought about by the invasion of Ukraine; as a result, it is no longer fit for purpose.”

“The government should scrap the price cap: it’s never been a cap, and in its current guise, it’s not doing what it was designed for,” he added.

Stewart instead suggested financially robust suppliers should be allowed to set prices in line with their hedging strategies and that the ban on acquisition-only tariffs should be kept.

Sharing similar concerns is Simon Oscroft, co-founder of So Energy, who stressed the need for the most vulnerable consumers to be supported.

He said: “Without further government support for struggling households, the risk and impact of a cold winter is deeply worrying.

“Compounding this, due to the complex way Ofgem’s quarterly set price cap is calculated, it is loading additional costs from the year on to suppliers in the Q4 price cap period. This will make it even harder for suppliers to price below the price cap level over the winter, meaning even less opportunity for customers to shop around and find cheaper deals. So Energy has been one of the only suppliers to offer fixed deals below the price cap level, but now will struggle to offer this in Q4 as things stand.

“This is another reason why the price cap is no longer fit for purpose. Suppliers, consumer groups, and now even Ofgem’s own chief executive recognise that it is doing more harm than good.

“In its place we need short term targeted support this winter, but also a more permanent replacement in the form of ongoing targeted support for those customers most in need.”

Although some suppliers have major reservations about the price cap, not all are against it.

Octopus Energy’s chief executive and founder, Greg Jackson, said the cap “has been one of the most effective policies to improve retail energy”.

Jackson said the cap had driven efficiency programmes and that it had cushioned the impact of the energy crisis.

He added: “It’s now forcing energy companies to pass on falling wholesales costs rather than pocketing profits.

“It protected customers – especially older and more vulnerable ones – from the loyalty penalty, and helped bring an end to the wild west of cowboy companies who sold at unsustainable prices leaving everyone to pick up the tab when they inevitably failed.”

Also commenting on today’s announcement is Energy UK, which has called for more targeted support. The trade body’s deputy chief executive welcomed the fall in the price cap from October, but added that energy bills are still much higher than they were 18 months ago.

Dhara Vyas added: “Suppliers will continue to do all they can to help customers but along with consumer groups, we are urging the government to look at providing targeted support for those most in need over the winter and to also press ahead with putting in place a long-term solution to ensuring energy bills are affordable for all customers.

“Making more of our homes energy efficient remains the best way of bringing down bills permanently for customers through using less energy – while expanding our own sources of domestic, clean power will help cut the cost of the energy itself.”

National Energy Action chief executive Adam Scorer also highlighted the need for more support, with the charity claiming 6.3 million households are still in fuel poverty.

“The price cap does not protect those who simply cannot afford the cost of keeping warm. That requires direct government intervention through bill support, social tariffs and energy efficiency,” he said.

He added: “The absence of targeted further financial support this winter to reduce the energy bills of the most vulnerable will mean millions of unheated homes and spiralling debt. It will add to the queues of people for the NHS and for the overstretched resources of charities like National Energy Action.

“The UK government can still act – by directly reducing energy bills via targeted energy discounts or a more targeted Energy Price Guarantee for low-income and vulnerable households. It knows how to do it. It has millions of pounds unspent from previous schemes. It is aware that failing to act will consign millions to another winter of despair and suffering.

“Beyond this winter, stubbornly high prices are here for the foreseeable future, but the UK government is backing away from the commitment to consult on a longer-term social tariff. That would leave the energy market stacked against low-income households. It would bake fuel poverty into the system. We also need long term investment in energy efficiency to build fuel poverty out of our homes.”

While there has been a lot of criticism of the cap, including calls for it to be scrapped, industry experts have said they believe it is too politically sensitive for the government to ditch it altogether.

Speaking to Utility Week recently Adam Bell, the government’s former head of energy strategy and current director of policy at consultancy Stonehaven, said: “There are really good policy reasons, technical reasons, for getting rid of the cap but the political reasons against it are overwhelmingly strong.”

You can read more of his thoughts here.