Ofgem published a discussion paper on the future of domestic price protection on 25 March 2024, setting out the successes and challenges of the default tariff price cap and asking whether reform is needed and what form it should take1. The paper seeks views from consumer groups and charities, suppliers and investors, and also welcomes responses from the public1. The deadline for responses is 10 May 20241.
The cap came into effect on 1 January 2019 under the Domestic Electricity and Gas (Tariff Cap) Act 20182. It was legislated to tackle an estimated £1.4bn of annual consumer detriment from operational inefficiencies and the overcharging of disengaged customers, often called the loyalty penalty1. Prior to the energy crisis around half of households were on the cap; it is now around 90% but starting to reduce1. The cap is set with reference to a stringent efficiency benchmark, applied universally, and based on a standing charge and a flat unit rate, with basic adaptations for Economy 7 and other default time of use tariffs1.
Ofgem states that the cap has worked well in maximising consumer protection and driving down supplier costs, but that it needs to evolve as the retail market changes1. It points to the introduction of Market-wide Half-Hourly Settlement (MHHS) from 2025, which it says will expose suppliers to the true costs of their customers' electricity consumption patterns1. The paper says customers with a higher proportion of consumption in peak periods will become more expensive to serve, while those with lower peak consumption will become less expensive, and that the flat cap unit rate does not reflect these changes in cost during the day1. It warns of a possible selection effect, where price cap customers are increasingly those with a higher cost to serve, and says Ofgem may have to increase the level of the cap so a notional supplier can recover its efficient costs1.
The paper sets out options along three dimensions: whether the cap should remain flat single rate pricing, move to time of use, or a combination; whether it should stay universal or be targeted at a sub-set such as those in vulnerable situations or on prepayment meters; and whether it should remain stringent as currently calculated or become market determined, such as a relative price cap or a principles based approach1. Ofgem says the options are illustrative rather than exhaustive, could be combined, and that different approaches could be taken to gas and electricity because the benefits of flexibility do not apply to gas in the same way1. It says it has not yet formed a view1.
"The price cap has worked well in maximising consumer protection and driving down supplier costs, but it needs to evolve as the retail market changes."
The paper sits alongside Ofgem's other work on standing charges, affordability and debt, and the Ban on Acquisition-only Tariffs1. It notes that the government's recent update on the Review of Electricity Market Arrangements (REMA) includes zonal pricing, where wholesale prices are set regionally, as an option for further consideration1. It also records that a temporary uplift to the price cap was introduced from the April 2024 cap1.
Why it matters for households
The cap is the backstop price for the roughly 90% of households on a default tariff, so any change to its structure affects what a home pays for each unit of gas and electricity and how much of the bill is fixed as a standing charge1. The paper raises the prospect that a flat, universal cap becomes harder to sustain as consumption patterns diverge, which could mean higher cap levels or protection narrowed to particular groups1. For a household, the practical question is whether price protection continues to cover the same flat rate at all hours, or whether it starts to reflect when electricity is used, which would matter for homes with electric vehicles, storage or Economy 7 and other restricted meters1. The outcome also bears on the choice between a fixed tariff and staying on the price cap, and on how tracker and time-of-use tariffs compare with the cap1.
What happens next
Responses are due by 10 May 20241. Ofgem says it will publish the non-confidential responses alongside a decision on next steps on its website1. The paper also refers to a review under section 9 of the DTCA, with the legislative context, potential issues and timing set out in an appendix1. No decision on the future shape of price protection has been announced.
Sources2 cited
- Future of domestic price protection, ofgem.gov.uk
- Future of domestic price protection, ofgem.gov.uk