Ofgem considering quarterly energy price cap updates due to market volatility
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Ofgem has said it is considering updating the energy price cap quarterly rather than every six months in efforts to make the market “fairer and more resilient”.
Unprecedented rises in gas prices were already occurring during 2021, even before the conflict in Ukraine began (in 2022) causing Europe-wide disruption to energy supplies.
The UK's energy price cap was increased last month, but the previous change came in August 2021 and therefore did not reflect the historic rises in wholesale prices for energy firms. This caused a multitude of energy firms to collapse within a short time period as they were forced to sell energy at a lower cost to their customers.
Ofgem said that a more frequent price cap would reflect the most up-to-date and accurate energy prices and should mean that when prices fall from the current record highs, customers would see the benefit much sooner.
This change would also help energy suppliers to more accurately predict how much energy they need to purchase for their customers.
Jonathan Brearley, Ofgem CEO, said: “Our top priority is to protect consumers by ensuring a fair and resilient energy market that works for everyone. Our retail reforms will ensure that consumers are paying a fair price for their energy while ensuring resilience across the sector.
“Today’s proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers. It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers.
“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.”
As well as changing the price cap every three months (instead of every six months), Ofgem said it would make a small reduction in the amount of notice suppliers get of the new price cap level.
It also wants to update the wholesale allowance to ensure that suppliers can recover “backwardation costs” in a reasonable period of time. Backwardation is when the current price of an underlying asset is higher than prices trading in the futures market.
The current method means that consumers are not able to reap the benefits of falling gas prices quickly enough.
Ofgem has launched a consultation on the new proposals which would allow it to bring in the changes from October ahead of what is anticipated to be a challenging winter for the energy sector.
The energy price cap currently sits at a record high of £1,971 per year for the average household.
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