Households whose energy payments are protected by Britain’s energy price cap may very well be locked into six-month deals much like fixed-term mortgages, below proposals set out by the regulator Ofgem to stop one other meltdown within the nation’s electrical energy and fuel market.
Ofgem has set out three potential adjustments to the price cap, which dictates payments for greater than 15m households, following complaints by some suppliers that the present methodology is just too rigid and leaves them unable to rapidly move on prices to customers when wholesale energy costs unexpectedly surge.
The proposals mark the strongest acknowledgment but by the regulator that the best way the price cap is structured is just not match for objective. The cap was launched in 2019 on the behest of then prime minister Theresa May’s authorities to guard folks from what she noticed on the time as “rip off” energy payments.
“The current price cap methodology, whilst protecting consumers from price spikes, exposes suppliers to risks that are harder to manage at times of high energy price volatility,” the regulator stated.
“There is a risk that, if not tackled, this could lead to higher costs for consumers.”
Other choices contain reviewing the price cap quarterly moderately than each six months, or much more steadily within the occasion of “extreme” volatility in wholesale markets.
A “call for input” on adjustments to the price cap was printed on Wednesday alongside a number of different proposals to enhance the monetary resilience of the market.
More than 25 suppliers have gone bust because the begin of August as sharp rises in wholesale energy costs because the summer season have uncovered deep vulnerabilities in lots of firms’ enterprise fashions.
Ofgem additionally confirmed that energy suppliers can be topic to monetary stress-testing from January whereas it plans to discover the way to defend prospects’ credit score balances, constructed up by way of direct debit funds, and forestall firms from misusing these to fulfill different monetary commitments.
Ofgem warned that even well-run suppliers are dealing with potential losses, as many households are selecting to change to price cap-protected deals when their fixed-price deals expire. In regular instances these prospects would store round for different fastened deals however these tariffs are actually a whole bunch of kilos dearer than the price cap.
This is creating issues for suppliers as a result of there’s an estimated £700 distinction per family a yr between the prices of shopping for energy on wholesale markets and the quantity suppliers can cost below the price cap, which was final reviewed in October and won’t change once more till April.
When wholesale costs fall, suppliers worry additional losses if prospects swap to cheaper fixed-price deals, once they have already agreed to purchase the energy for these prospects at a a lot greater price.
Suppliers have lengthy complained that the present methodology consists of an eight-month lag between the wholesale costs which might be used to tell the extent of the cap and when these prices might be handed on to customers.
Ofgem acknowledged that if the price cap is just not modified, “there is a risk of further supplier failures and exits, and an undermining of investor confidence to enter or invest in the retail market”.
“This could lead to reduced competition and higher costs for consumers,” it added.
Suppliers have till January to offer suggestions on the potential diversifications earlier than a proper session is launched in 2022, if there’s adequate assist for adjustments. Ofgem intends to introduce any adjustments in October 2022.
A transfer to fixed-term price cap deals might show controversial with some shopper teams, nonetheless, as a result of they might contain exit charges.
At current, households are free to change away from price cap-protected tariffs at any time.