Energy watchdog proposes setting price cap every three months


By Dearbail Jordan

Business reporter, BBC News

Image source, Getty Images

Household energy bills could change every three months under new plans aimed at avoiding price shocks.

Currently gas and electricity bills are updated every six months.

The plans, proposed by the energy regulator Ofgem, would mean price falls and rises would be passed on to customers more quickly.

It comes as the UK cost of living is expected to rise further, prompting calls by Labour for a windfall tax on oil and gas firms to help households.

The price cap – which is the maximum price per unit that suppliers can charge customers – is updated twice a year in April and October.

Last month, a typical energy bill jumped from £1,277 to £1,971 and is forecast to soar a further 32% when the cap is revised again in October.

For people on prepayment meters, the price of energy has now risen by an average £708 to £2,017 a year.

Ofgem’s chief executive Jonathan Brearley said: “The proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers.

“It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers.”

Since early last year, more than 30 UK energy companies have gone bust after firms found themselves unable to pass on the full cost of soaring wholesale gas to customers because of the price cap.

Irrespective of whether Ofgem’s plan is rubber-stamped, the next time your domestic energy price will change is in October – and it will be another rise.

Industry estimates suggest another £600 a year increase for a typical household, taking the annual bill to £2,600. After that, prices are expected to fall back, but not by much. Analysts at consultancy Cornwall Insight have predicted a drop to £2,300 in the spring, summer and winter of 2023-24.

These proposals do not mean that fall would be any greater, but it could come sooner.

There was discussion and debate about the frequency of changes to the price cap when it was first introduced. Now a more frequent price cap looks inevitable.

But how households manage to pay their bill, what support they receive to do so, and how long those bills stay high remain far more pressing issues.

International wholesale gas prices jumped last year as demand outstripped supply. But they have remained elevated due to Russia’s invasion of Ukraine.

Russia is a major gas supplier to many countries, but some have announced plans to wind down their dependence on the country for energy in response to its assault.

Ofgem said, following a consultation, it hopes to introduce quarterly price cap reviews from October to “support the sector through a potentially challenging winter”.

But Justina Miltienyte, head of policy at price comparison site, warned that a quarterly update after an expected sharp rise in bills in October “could demand a swift revision to household budgets at one of the most expensive times of year”.

She said: “Until now, the price cap has at best acted as a delay mechanism for the pain of rising wholesale prices, but it is unable to prevent harsh increases hitting customers altogether. A quarterly review means that the ability of the cap to delay the pain of rising prices is shorter.

“Conversely, if wholesale prices start falling, Ofgem would have the ability to pass these through to those on standard plans a little sooner.”

Rising household energy bills have helped push up the UK inflation rate to 7%, and the Bank of England has warned that the cost of living could rise above 10% later this year.

The National Institute of Economic and Social Research think tank is estimating that 1.5 million households will struggle to pay energy and food prices in 2022.

Labour is set to call for a vote this week on introducing a windfall tax on oil and gas companies who have benefitted from the sharp rise in energy prices.

The government is concerned a windfall tax on the likes of BP and Shell would prevent them from investing in the UK. However, the chancellor has said the option is “not off the table”.

Ofgem also recently said that it is reviewing whether energy suppliers are raising customers’ direct debit payments by “more than is necessary”. If Ofgem finds any rules have been broken it could issue substantial fines.

Energy UK, which represents the industry, said: “Suppliers are required to set [direct debits] at a fair and reasonable level based on the customer’s individual circumstances, taking into account factors like previous energy use or record with previous payments.”

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