Ofgem has decided to proceed with a modification to the gas and electricity supply licences that gives it the power to recalculate the default tariff cap within a cap period, the regulator said on 4 February 20221. The change to standard licence condition 28AD follows a consultation opened in November 2021 on amending the cap outside the routine six-monthly cycle where exceptional circumstances apply1.
The energy price cap was introduced on 1 January 2019 and currently protects around 22 million households on standard variable and default tariffs1. Updates to the cap level normally occur in February and August, applying to cap periods starting in April and October respectively, and the cap is set using a bottom-up cost assessment approach1. Ofgem said that under the existing licence conditions it was unable to set the cap level outside the scheduled updates without a licence modification1.
The regulator set out five tests it will apply when assessing an event or circumstances: rare, externally caused, not reasonably avoidable, appropriate and requires urgent action1. It said it has decided not to set quantitative thresholds, and that the direction of an adjustment could be upwards or downwards depending on the impact of the specific exceptional circumstance1. Adjustments will be forward looking only, applying for the remainder of the cap period rather than retrospectively for the entire cap period1. Ofgem added that, if appropriate and necessary, it will shorten the consultation or implementation period compared with the timings set out in the Tariff Cap Act1.
"We have decided to proceed with modifying SLC28AD of the gas and electricity supply licences to set out a power to recalculate the cap level within a cap period in exceptional circumstances."
Ofgem received responses from 20 stakeholders consisting of energy suppliers, consumer organisations and trade bodies; ten disagreed with the proposal to introduce an in-period adjustment and eight agreed1. It also received approximately 40,000 responses to the November 2021 consultation through a petition website, of which approximately 3 per cent (just over 1,000) said Ofgem should change the price cap more frequently than every six months, 86 per cent (34,000) disagreed, and 6.9 per cent made other comments1.
| Test | Meaning as set out by Ofgem |
|---|---|
| Rare | A rare event in nature or scale, the consequence of which was not wholly included in the calculation of the current cap |
| Externally caused | The cause is external to suppliers within the energy market |
| Not reasonably avoidable | Suppliers taking reasonable steps to mitigate the impact have limited or no success and face unavoidable cost changes |
| Appropriate | The event impacts the efficient costs of supply |
| Requires urgent action | Urgent action by Ofgem is necessary within the remaining cap period |
Ofgem said the reform changes to the cap methodology will not be in place until October 20221. It also announced changes to the cap level from 1 April 2022 covering an uplift to the wholesale cost allowance1. It noted a record increase in global gas prices over the previous six months, with wholesale prices quadrupling in the last year, and said 29 energy companies had exited the market or been put in special administration over the last year1.
Why it matters for households
The cap is the limit on unit rates and standing charges for households on default tariffs, so any recalculation inside a cap period changes what those households pay before the next scheduled April or October reset1. The new power means the level can move up or down mid-period, and Ofgem has said it will not use fixed numerical triggers, so the timing of any change rests on its judgement against the five tests1. Ofgem acknowledged the policy may somewhat increase uncertainty for industry and customers because there is reduced forward visibility on when the cap will be updated, and said its intention to use the power only in exceptional circumstances limits that uncertainty1. The tariff rules that govern what suppliers must offer, and the role of Ofgem in setting and enforcing the cap, are unchanged by this decision. For a household, the practical effect is that the date on which the capped rate can change is no longer fixed to the six-monthly cycle alone.
What happens next
The licence modification takes effect through the decision published on 4 February 2022, but Ofgem said the reform changes to the cap methodology will not be in place until October 20221. Changes to the cap level from 1 April 2022, covering the uplift to the wholesale cost allowance, were announced alongside the decision1. Ofgem said it will consider whether any further changes are required to the in-period adjustment policy once it has implemented reforms to the cap methodology resulting from its work on adapting the price cap methodology for resilience in volatile markets1.