Energy price cap to be updated quarterly to tackle market volatility
Image credit: PA Media
The energy price cap will be updated quarterly, rather than every six months, Ofgem has said, as consumers face extremely high energy prices next winter.
The regulator said the change would provide more stability in the energy markets and reduce the risk of further large-scale supplier failures, the likes of which cost energy customers roughly £164 each last year.
Although Britain only imports a small amount of Russian gas, Russia’s actions have created extreme volatility in the global energy market leading to unprecedented highs in the cost of oil and gas and therefore electricity.
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 per cent. As a result of the market conditions, the price cap will have to increase to reflect increased costs, Ofgem said ahead of plans to publish the next price cap level at the end of August.
It added that a quarterly price cap will help consumers to enjoy the benefits of falls in the wholesale price sooner but that the market remains volatile and 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.”
Ofgem plans to also shorten the notice period between the announcement and implementation of a new cap so that prices reflect gas and electricity costs more quickly and accurately.
Brearley had previously predicted that the price cap would rise in October to “in the region of £2,800”.
Speaking to BBC Radio 4’s 'Today' programme he said: “I would say that it’s very clear that we expect significant increases again in prices, even over and above the estimate that we made in May. And that just shows you how dramatically the market is changing.”
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