Ofgem has announced plans to move the price cap to a quarterly review, according to Energy UK, the industry body, in a blog published on 20 May 2022. The change would aim to ensure changes in wholesale costs, including falls, are reflected in customer bills much sooner than under the present arrangement1.
The cap is a maximum amount suppliers can charge consumers for the energy they use1. Under the current system, wholesale cost changes take time to reach households because suppliers buy most of their energy in advance, by a season or a year, a practice known as hedging1. Energy UK said that what happens on the day ahead market, where gas is bought for immediate use, has limited effect on bills, and that only a consistent fall in the cost of gas on the forward market will feed through to a reduction in bills1.
The blog set out the scale of the disruption in the retail market. Twenty-nine energy suppliers have gone out of business since August 2021, and around 2.3 million customers have been transferred to another supplier as a result1. Some of those suppliers failed because they did not hedge as much in advance and were exposed when prices spiked to record levels, forcing them to buy energy at unprecedented prices and at a huge loss, because the cap prevented them from recouping the costs1. The additional cost of taking on customers from failed suppliers could reach £2.4bn according to Ofgem, and is recouped via bills1.
Energy UK also said that more customers than suppliers expected have stayed on the price capped standard variable tariff, and that some companies were subsidising some of their customers by up to £700 per account until the recent price cap rise1. Before the current gas price crisis, most suppliers had not made a profit from their domestic retail customers1.
"Ofgem has announced plans to move to a quarterly price cap review, which would aim to ensure changes in wholesale costs (including falls) are reflected in customer bills much sooner"
Why it matters for households
The timing of the cap determines when wholesale price movements reach a household budget. A quarterly review shortens the gap between what suppliers pay for energy and what appears on a bill, in both directions: falls in wholesale costs would arrive sooner, and rises would too. Energy UK stated that the immediate outlook is for further bill rises later this year1.
The costs of supplier failures are already inside bills. The £2.4bn figure cited by Ofgem is recouped through customer bills, so households are paying for the transfer of the 2.3 million customers whose suppliers collapsed1. For a home's energy independence, the practical point is that the price a household pays is set by a formula tied to wholesale markets and to these added costs, not by the choice of supplier alone. Energy UK said the market is in a fairly fragile state and that a new approach to regulating the sector will be essential once through the immediate crisis, and welcomed the Government's Review of Electricity Markets Arrangements and retail market review1.
What happens next
No date for the introduction of the quarterly review is given in the source, and the mechanics of how it would operate have not been reported1. Energy UK said it continues to call on the Government to provide more support for consumers ahead of next winter, warning that another increase in energy bills could place millions more into fuel poverty1.