Ofgem’s Options for Price Cap Reform

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Following the announcement of Ofgem’s new price cap rises for April 2022, the energy regulator is mulling over certain options for reforming the energy price cap to help battle the ongoing energy crisis.


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With the ongoing energy crisis claiming two more victims this past week - Whoop Energy and Xcel Energy - the UK’s energy regulator Ofgem has more plans in store for improving the market’s resilience to add to the latest energy price cap increase for April 2022.

Included in Ofgem’s action plan for 2022, among other changes such as protecting customer balances and introducing stress tests for suppliers, Ofgem have also been looking into possible price cap reforms in order to help the market better prepare for crises in the future.

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Why Does the Price Cap Need Reform?

The price cap has been one of the major reasons cited for making the ongoing energy crisis worse. This is because the price cap does not allow suppliers to charge more for their energy when wholesale gas prices are increasing dramatically. This means that the price cap maximum is too low for suppliers to manage costs.

As wholesale prices have increased, fixed tariffs have become more expensive and many more customers have switched over to the price cap tariff. As suppliers usually have to buy their energy in advance for their price cap customers, the increased demand at higher wholesale prices has had a big impact and many suppliers have been forced to close.

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What Options Are Ofgem Considering?

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In order to best tackle the price cap situation, Ofgem are considering a number of solutions that help suppliers better handle the rising costs and that still protect customer interests. So far, the options on the table are:

  1. Quarterly price cap updates - the price cap will be reviewed every quarter rather than every six months. This will allow suppliers to adjust their price more efficiently to keep up with the market shifts
  2. Price cap contracts - this would mean that customers who take a default tariff will have to commit to it for 6 or 12 months. This will help reduce seasonal costs to suppliers and give customers stability. Ofgem are not considering an exit fee with price cap contracts.

Ofgem have evaluated these two options and are still currently deciding which to implement before October 2022. However, although the price cap contracts are an effective option, Ofgem questions the logistics in implementing it before October, therefore they are leaning towards a quarterly update model.

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How Will This Affect Me As a Customer?

As a customer, regular price cap updates means that tariffs will update more quickly. This means that there might be a smaller window for consumers to grab the best tariffs on offer and that tariff prices will be more varied.

In a default tariff scenario however, customers will be expected to remain committed to a price capped rate for a certain period of time. This will reduce the flexibility that customers will have over their energy, but it will give customers a better sense of security knowing that they will not face monthly price rises.

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Will I Still Be Able To Save?

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It is very likely the time of competitively low tariffs is over. High wholesale gas prices, despite having stabilised, are likely to remain with us until 2024. However, since Ofgem is expecting to raise the price again in October 2022 by at least another 20%, staying on the price cap might lead to further price rises.

When the April price cap comes in, suppliers will be able to have greater flexibility over what tariffs to offer and it is possible that some suppliers will offer fixed tariffs that will help lock in prices before the rise in the autumn. Also owing to international factors surrounding the gas supply it is possible that the next price cap might be even higher.

What Help Is There Available? In response to the rising energy prices, the government has announced schemes to help those customers struggling.

Up to £350 per household to help customers manage their energy bills. £200 will be a discount off energy bills to apply in October and will be paid back by customers from 2024. £150 will be a Council Tax Rebate for those households in Tax Bands A-D.

In addition, the government has raised the Warm Home Discount to £150 and launched £144 million of discretionary funding to councils.

You may also be able to take advantage of other schemes that have been set up to help customers with their energy bills. You can read about them in our Home Energy Grants and Schemes Guide.

What Have Ofgem Done So Far?

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Ofgem has already brought in new measures to help deal with the energy crisis. Some of these measures are only meant to be temporary until October 2022, but they have been identified as key for dealing with the crisis.

Early Price Cap Changes in Emergencies

On the same day that the new price was announced, Ofgem announced that it would bring in a new mechanism where it can make in-period price cap changes in exceptional circumstances.

This means that if the energy market started having significant problems, Ofgem could modify the price cap early. The market would have to comply with the following conditions:

  1. Rare - such as unexpected rises in energy prices
  2. Externally caused - like the rise in wholesale gas prices in international markets
  3. Unavoidable - after suppliers had taken reasonable steps the problem still persists
  4. Appropriate - the crisis impacts supply significantly
  5. Urgent action needed - Ofgem needs to intervene

Ofgem will judge if the market is reaching these conditions and will intervene if they see its necessary.

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Making All Tariffs Available to All Customers

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Part of its temporary measures in place until October 2022, Ofgem announced that it would make suppliers offer all their available tariffs to both existing and new customers.

Currently, a supplier can offer exclusivity to new customers with cheaper tariffs to beat competitors. This has been deemed as unfair as existing customers are essentially punished for their loyalty.

This new measure from Ofgem hopes to reduce aggressive price competition and help support customers by regaining their trust in the market.

A Market Stabilisation Charge

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Also included in Ofgem’s temporary measures until October is a market stabilisation charge. This will be a charge that suppliers will have to pay to another supplier when a customer switches.

When a customer switches to a new supplier, the gaining supplier will have to pay the market stabilisation charge to the losing supplier if wholesale gas prices fall. If gas prices fall, the losing supplier will lose out because they had already bought energy for that customer.

The market stabilisation charge is there to compensate those suppliers who bought their energy in advance and in preparation for a dramatic decrease in gas prices.

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