Ofgem proposes to review their price cap every 3 months

May 27, 2022 | Bills, Electricity & Gas | 0 comments

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Ofgem, the UK’s energy market regulator, revealed plans last week to begin adjusting the energy price cap every three months instead of every six – meaning there could be price reviews coming July and January. 

 

What is the Energy Price Cap?

Ofgem’s Energy Price Cap is the maximum amount a supplier is allowed to charge an “average user” for their gas and electricity in a year. Its purpose is to protect consumers from over expensive tariffs. Currently, the price cap is reviewed twice a year in April and October.

In last month’s review, the energy price cap jumped 54% from £1,277 to £1,971 per year, affecting 22 million homes across the UK.

 

What is being proposed?

-The Energy Price Cap level would now change every three months instead of every six months

-There would be a slight reduction in the number of notice suppliers get of the new price cap level

Source: Ofgem

 

What happens when the price cap is reviewed more regularly? 

Ofgem has said a more regular review of energy prices  “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. “ 

CEO of Ofgem, Jonathan Brearley explained, “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.”

A more frequently reviewed price cap would mean energy suppliers can make better predictions for the quantity of energy they purchase, lowering the risk of business failures – which either increases costs for customers or leads energy firms to go bust.

Since the beginning of 2021, almost half of the UK’s energy firms have gone bust, including Bulb, Avro, Green, People’s energy, Utility point, and many other smaller suppliers. The energy price cap at the time was not reflecting skyrocketing gas wholesale prices (which had jumped a whopping 250% at that point), so firms were forced to sell energy to consumers at a huge loss, and eventually enter Special Administration Regime (SAR).

 

What does this mean for my energy bills?

For customers, this means there could potentially be more fluctuation in bills this year as prices will come down as quickly as they go up. If the energy wholesale prices descend, customers (not on fixed tariffs) will benefit from lower prices more quickly; however, if energy prices soar again, there won’t be much protection for long.

The consultation for the new price cap reviewing system will be open until Tuesday 14 June 2022. Ofgem is looking to implement these reforms coming October.

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