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 a range of options for how consumer price protection could evolve1. The paper states that the government's recent update on the Review of Electricity Market Arrangements (REMA) includes zonal pricing, meaning wholesale prices set regionally, as an option for further consideration1. Responses are due by 10 May 20241.
The cap was legislated by Parliament in 2018 to tackle an estimated £1.4bn of annual consumer detriment from operational inefficiencies and the overcharging of disengaged customers, often called the loyalty penalty1. Before the energy crisis around half of households were on the cap; it is now around 90% but starting to reduce1. The cap is applied universally, so all consumers on it pay the same unit rate for a given region and payment method regardless of household circumstances or consumption patterns, and it is built on a standing charge and a flat unit rate, with basic adaptations for Economy 7 and other default time of use tariffs1.
Ofgem says the introduction of Market-wide Half-Hourly Settlement (MHHS) from 2025 will expose suppliers to the true costs of their customers' consumption patterns, making customers with more consumption in peak periods more expensive to serve and those with less peak consumption cheaper1. The paper states that the electricity unit rate under the current flat cap does not reflect these changes in cost during the day1. It warns that customers able to flex demand will have an incentive to move to a time of use tariff, while those with high-cost consumption patterns will have an incentive to stay on or move to the flat default tariff, which could lead to price cap customers increasingly being those with a higher cost to serve1.
The paper sets out options along three axes: whether the cap should be flat single rate, time of use, or a combination; whether it should be universal or targeted at a sub-set such as those in vulnerable situations or on prepayment meters; and whether it should be stringent as currently calculated or market determined, for example a relative price cap or a principles based approach1. Ofgem says the options are illustrative rather than exhaustive, could be implemented independently or 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 view on the appropriate approach1.
"The government's recent update on REMA includes zonal pricing (wholesale prices set regionally) as an option for further consideration"
The paper also notes that Ofgem has introduced a temporary uplift to the price cap from the April 2024 cap1. It sits alongside Ofgem's wider work on standing charges, affordability and debt, and the Ban on Acquisition-only Tariffs1. The document refers to a review under section 9 of the Domestic Tariffs (?) legislation, listed in its appendices as the DTCA1.
Why it matters for households
The cap sets the maximum a supplier can charge on a default tariff, so any change to how it is calculated reaches the roughly 90% of households now on it1. A move to zonal wholesale pricing would mean the wholesale cost element of the cap differs by region, because wholesale prices would be set regionally rather than nationally1. The paper does not state what that would mean for any individual household's bill, and no regional figures have been reported1.
The flexibility question is about when electricity is used rather than how much. Under MHHS from 2025, suppliers face the actual cost of their customers' half-hourly consumption, so a household that uses more at peak becomes more expensive to serve1. Ofgem's concern is that a flat cap cannot reflect that, and that households least able to shift their usage could end up paying more while those who can shift move to time of use tariffs1. For a home's energy independence, the practical point is whether price protection continues to cover a single flat rate, or whether it starts to depend on when and how a household uses power. The paper sets out no decision, and no change to the cap has been announced1.
What happens next
The deadline for responses to the discussion paper is 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 its timing set out in the appendices1.
Sources1 cited
- Future of domestic price protection, ofgem.gov.uk