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 options for how consumer price protection might evolve1. The response deadline is 10 May 20241.
The cap came into effect on 1 January 2019 under the Domestic Electricity and Gas (Tariff Cap) Act 20181. Ofgem states it was legislated by Parliament in 2018 to tackle an estimated £1.4bn of annual consumer detriment resulting from operational inefficiencies and the overcharging of disengaged customers, often referred to as the loyalty penalty1. Prior to the crisis, around half of households were on the cap; it is now around 90% but starting to reduce1.
The paper describes the cap as flat, universal and stringent: a standing charge and a single unit rate that does not vary through the day, applied to all consumers on the cap for a given region and payment method, and set with reference to a stringent efficiency benchmark1. Ofgem says it will be challenging to maintain a cap with those three characteristics as the retail market becomes more diverse, and that it may have to increase the level of the cap so a notional supplier can recover its efficient costs for default tariff customers1. It sets out options that move away from a flat cap, a universal cap or a stringent cap, which could be implemented independently or combined1.
"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 links the timing of reform to Market-wide Half-Hourly Settlement (MHHS), which Ofgem says will be rolled out over 18 months from spring 2025 and will expose suppliers to the true costs of their customers' electricity consumption patterns1. It notes that customers with a higher proportion of consumption in peak periods will become more expensive to serve, and that the flat cap unit rate does not reflect these changes in cost during the day1. Ofgem also records that it introduced a temporary uplift to the price cap from April 2024, and that it announced its decision to remove the Ban on Acquisition-only Tariffs following an extension for up to another 12 months1. The government launched the Review of Electricity Market Arrangements (REMA) in April 2022, and its recent update includes zonal pricing as an option for further consideration1.
| Element of the cap | Current approach | Options discussed |
|---|---|---|
| Price structure | Flat single rate | Time-of-use, or a combination |
| Coverage | Universal, all default tariff customers | Targeted to a sub-set, such as those in vulnerable situations or on prepayment meters |
| Level | Stringent, based on a notional efficient supplier | Market determined, such as a relative price cap or a principles based approach |
Why it matters for households
The cap is the backstop for households that have not switched, and around 90% of them are on it1. The paper states that without some form of price protection there is a risk of a return of price exploitation of inactive customers1. It also warns of a selection effect: households able to shift consumption to cheaper periods have an incentive to move to a time-of-use tariff, while those with high-cost consumption patterns have an incentive to stay on the flat default tariff, so cap customers could increasingly be those with a higher cost to serve1. Ofgem says customers facing the greatest affordability challenges, and those least able to benefit from flexibility, risk paying higher prices1. For a home's energy independence, the practical question is whether the protected default tariff continues to be a single flat rate, or becomes something that varies by time of use, by household group, or by a market-derived benchmark. The paper states Ofgem has not formed a view on the appropriate approach1.
What happens next
Responses are due by 10 May 2024, and Ofgem says it will publish the non-confidential responses alongside a decision on next steps1. The paper also refers to a review under section 9 of the DTCA, and notes that the requirement for annual review and the sunset clause were removed through the Energy Prices Act 20221. No date for that review's conclusion is given in the paper1.
Sources2 cited
- Future of domestic price protection, ofgem.gov.uk
- Future of domestic price protection, ofgem.gov.uk