Fixed-term deal for UK energy price cap proposed by Ofgem

Households whose energy bills are protected by the UK energy price cap could be locked into six-month deals similar to fixed-term mortgages, under proposals made by the agency management put in place by Ofgem to prevent another downturn in the country’s electricity and gas markets.

Ofgem has rolled out three potential changes to price caps, which bill more than 15 million households, after some suppliers complained that the current methodology was too inflexible and make it impossible for them to quickly pass costs on to consumers when wholesale energy prices spike.

The proposals mark the regulator’s strongest recognition yet that the way hat price structured unfit for purpose. The limit was introduced in 2019 by order of then-Prime Minister Theresa May’s government to protect people from what she saw at the time as “ripping off” energy bills.

“The current method of capping prices, while protecting consumers from price spikes, exposes suppliers to a risk that is more difficult to manage at a time of highly volatile energy prices,” the regulator said. “.

“There is a risk that, if left unaddressed, this could lead to higher costs for consumers.”

Other options involve looking at price caps quarterly rather than every six months, or even more frequently in the event of “extreme” volatility in wholesale markets.

A “call for input” on changes to the price cap was published on Wednesday along with several other proposals to improve the market’s financial resilience.

More than 25 suppliers went bankrupt Since the beginning of August, a sharp increase in wholesale energy prices since the summer has exposed deep holes in the business models of many companies.

Ofgem also confirmed that energy suppliers will have to financial stress test from January while they plan to explore ways to protect customers’ credit balances, built through direct debit payments and prevent companies from misuse to meet financial commitments. other main.

Ofgem warns that even well-run providers are facing potential losses, as more households are choosing to switch to price-cap protections as fixed-price deals their expired. In normal times those customers would shop around other fixed deals but those tariffs are now hundreds of pounds more expensive than the price cap.

This is creating problems for suppliers as there is an estimated difference of £700 per household a year between the cost of purchasing energy on the wholesale market and what the supplier is able to charge. price cap, last reviewed in October and will remain unchanged until April.

As wholesale prices fall, suppliers fear additional losses if customers switch to cheaper fixed-price deals, when they have agreed to buy energy for those customers at much higher prices.

Suppliers have long complained that the current method includes an eight-month delay between the wholesale prices used to announce the cap and when those costs can be passed on to consumers.

Ofgem acknowledges that if the price cap is not changed, “there is a risk of further failure and withdrawal from suppliers, and at the same time undermining investor confidence when entering or investing in the market.” retail”.

“This can lead to reduced competition and higher costs for consumers,” it added.

Suppliers have until January to provide feedback on adaptations before formal consultations in 2022, if sufficient support is available for the changes. Ofgem intends to introduce any changes by October 2022.

However, the move to capped-price, fixed-term deals could be controversial for some consumer groups, as they will involve exit fees.

Households are now free to switch from the price cap-protected tariff at any time.

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