Regulator to review workings behind its energy price cap

·2-min read
 (Pexels  )
(Pexels )

Energy watchdog Ofgem is launching a consultation to investigate whether its price cap introduced in 2019, is still fit for purpose.

It follows the recent collapse of several UK energy firms as the cap has prevented them from passing on soaring costs of wholesale energy prices to their customers.

The energy price cap is reviewed twice a year, with each new cap taking effect in October and April. While the cap increased earlier this month by 12%, the cost of natural gas has risen by a staggering 300% in the last 12 months alone.

What does Ofgem plan to do?

In an open letter to energy suppliers, Ofgem’s chief executive, Jonathan Brearley said the regulator will consult on the price cap methodology to ensure it ‘appropriately reflects the costs, risks and uncertainties facing suppliers’.

He said it also wants suppliers to ‘improve the way they manage financial risks’ to reduce their exposure to unexpected soaring costs, such as those that took place this year.

He added that the consultation will look at an ‘enhanced approach to monitoring, compliance and enforcement of licence conditions to ensure energy suppliers pursue a sustainable business model, minimising risks to customers and the market as a whole’.

In the meantime, Ofgem expects energy suppliers to ‘continue to comply with their licence obligations including providing support to their most vulnerable consumers’.

What does it mean for energy prices?

However, with the price cap already set at £1,277 a year (for households on variable rate tariffs using an average amount of energy), there are fears that the next review next spring will see it climb further still, just so the remaining energy firms can keep afloat.

With the current rising cost of living expected to continue well into next year, this could put further strain on already-stretched household budgets.

Cheaper fixed rate energy tariffs have also been unavailable, and are unlikely to see a return to the market until wholesale prices become more feasible for suppliers.

When does it happen?

Ofgem’s consultation will begin next month, with the regulator publishing its findings and actions in February 2022. This will mean it has time to implement any changes by 1 April 2022 when the next cap will be implemented.

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