Ofgem announces quarterly price cap change

5th August 2022

Ofgem has announced that the energy price cap review will be updated every three months instead of six.

The energy regulator says that the change will go some way to provide the stability needed in the energy market, reducing the risk of further large-scale supplier failures which cause huge disruption and push up costs for consumers. It is not in anyone’s interests for more suppliers to fail and exit the market.

Although Britain only imports a small amount of Russian gas, as a result of Russia’s actions, the volatility in the global energy market experienced last winter has lasted much longer, with much higher prices for both gas and electricity than ever before.

The price cap, as set out in law in 2018, reflects what it costs to supply energy to our homes by setting a maximum suppliers can charge per unit of energy, and caps the level of profits an energy supplier can make to 1.9%, protecting millions of households. As a result of the market conditions, the price cap will have to increase to reflect increased costs and Ofgem will publish the next price cap level at the end of August.

While the price cap will have to rise, it continues to remove the risk of prices rising quickly for consumers when wholesale prices go up but falling slowly and less fully when they go down. When wholesale prices fall, these reductions will be passed on in full to customers through a lower price cap. This will happen more quickly with the quarterly price cap.

Ultimately energy has to be paid for in full and the price cap has to reflect the costs to the supplier of buying it wholesale and supplying it to homes, which makes up most of people’s bills. The price cap is also not a cap on the maximum bill a household can be charged, which is based on their usage.

Today’s changes are being made so that prices reflect gas and electricity costs more quickly and accurately, so they don’t lag behind changes in the market. However, the market remains volatile and so the price cap methodology will be kept under review.

Jonathan Brearley, CEO of Ofgem, 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.”

 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.”

Caroline Abrahams, Charity Director at Age UK, said “Ofgem’s decision to move to quarterly price cap changes is a hammer blow to the millions of consumers already struggling to pay sky-rocketing bills. With household energy costs widely predicted to reach shockingly high levels from October, the decision to press ahead with yet another price cap change in January poses an enormous threat to the health and wellbeing of vulnerable older households across Britain.

“At Age UK, we have consistently warned Ofgem that a quarterly price cap represents a significant risk to many older consumers. We are very concerned that a January price rise will hit consumers with a bill increase during the coldest period of the year – no doubt leading to many more people risking their health by turning their heating down or off altogether. After enduring a tough autumn of higher prices, consumers will be forced to go through one of the worst winters in the energy market in living memory without the reassurance the cap usually provides.”

“Estimates suggest the typical consumer will be spending over £3,600 on their annual bill after the expected cap increase in January, almost doubling prices compared with today. Ofgem must rethink its decision to enact quarterly price cap changes this winter and the Government needs to rapidly step-up financial support for those of all ages struggling on the lowest incomes. It is also essential that the Government sticks to its promise and reinstates the triple lock next year to protect the value of the State Pension and provide a safety net for the many older people who literally have nothing left to cut back on.

“In the meantime, we’re urging any older person who is struggling to get in touch in case they are entitled to some extra financial support. Successfully claiming Pension Credit will not only boost your income but if you make your claim as soon as possible you could be entitled to additional support of up to £800 through cost-of-living payments and the Warm Home Discount, alongside other financial help – this could make a huge difference to older households struggling with rocketing bills this winter.”