The UK government launched the Review of Electricity Market Arrangements (REMA) programme in April 2022, according to Ofgem's discussion paper on the future of domestic price protection1. The programme is described as aiming to reform Great Britain's electricity markets for a secure, low carbon system.
Ofgem's paper, published on 25 March 2024, sets out the context in which REMA sits. It states that the default tariff cap came into effect on 1 January 2019 under the Domestic Electricity and Gas (Tariff Cap) Act 2018, and that through the Energy Prices Act 2022 amendments were made to that Act so the cap could act as the reference price for the Energy Prices Guarantee, with the requirement for annual review and the sunset clause removed1. The paper also notes that since October 2022 the cap has had to be set at a level that takes account of its impact on public spending1.
The regulator frames REMA alongside wider changes to retail pricing. It states that the introduction of Market-wide Half-Hourly Settlement (MHHS) from 2025 will enable flexibility, and that MHHS is being rolled out over 18 months from spring 20251. Ofgem adds that it has introduced a temporary uplift to the price cap from the April 2024 cap, and that it announced its decision to remove the Ban on Acquisition-only Tariffs following an extension for up to another 12 months1.
"The UK government launched the Review of Electricity Market Arrangements (REMA) programme in April 2022"
The paper sets out options for how price protection might evolve, describing choices over whether the cap should be flat single rate pricing as now, time-of-use, or a combination; whether it should be universal or targeted to a sub-set such as those in vulnerable situations or on prepayment meters; and whether it should be stringent as currently calculated or market determined1. Ofgem states it is yet to form a view of the appropriate approach and that the options are illustrative rather than exhaustive1.
| Element of the cap | Options set out by Ofgem1 |
|---|---|
| Price structure | Flat single rate as now, time-of-use, or a combination |
| Coverage | Universal, or targeted to a sub-set such as vulnerable customers or prepayment meter customers |
| Calculation | Stringent, based on a notional efficient supplier, or market determined |
Why it matters for households
The cap limits what a supplier can charge on default tariffs, and Ofgem states that prior to the energy crisis around half of households were on the cap, rising to around 90% and starting to reduce1. Because the cap is applied universally, all consumers on it pay the same unit rate for energy for a given region and payment method, regardless of household circumstances or consumption patterns1. Ofgem states that the electricity unit rate under the current flat cap does not reflect changes in cost during the day, and that customers with a higher proportion of consumption at peak periods will become more expensive to serve as MHHS exposes suppliers to the true costs of consumption patterns1.
The paper warns that customers able to flex demand will have an incentive to move to a time-of-use tariff, while those with high-cost patterns of consumption will have an incentive to stay on or move to the flat default tariff, potentially leading to a selection effect where price cap customers are increasingly those with a higher cost to serve1. It states that without some form of price protection there is a risk of a return of price exploitation of inactive customers1. For a household's energy independence, the direction of REMA and of the cap review bears on how far a home can be rewarded for shifting consumption away from peak times, and on what protection remains for homes that cannot.
What happens next
The response deadline for Ofgem's discussion paper is 10 May 2024, and Ofgem states it will publish the non-confidential responses alongside a decision on next steps1. The paper also refers to a separate call for input on affordability and debt in the domestic retail market, published earlier in March 2024, with a response deadline of 10 May 20241. No further dated steps for the REMA programme itself are given in the paper.
Sources1 cited
- Future of domestic price protection, ofgem.gov.uk