Ofgem to update energy price cap quarterly

It warned that consumers are facing a "very challenging winter ahead" as Russia's invasion of Ukraine led to volatility in the global market. 

This period of volatility lasted “much longer, with much higher prices for both gas and electricity than ever before”.

Ofgem hopes the change will "provide the stability needed in the energy market”.

As a result of the market conditions, the price cap is expected to increase later this month to reflect increased costs. 

Ofgem said that the changes would mean that any fall in wholesale prices would be passed on in full to customers and more quickly with the quarterly price cap.

However, some experts have warned that it will mean customers will see their bills "going up more frequently than before". 

Business, Energy and Industrial Strategy Committee chairman Darren Jones said: “Whilst the change announced by Ofgem today will prevent more energy suppliers going bust, and the cost of failures being added to our bills, it also means customers will see their bills going up more frequently than before. These increases won’t be as big as before but they’ll be increases nonetheless.

“When the price of energy starts to come down, customers will see their energy bills reduce more quickly, but I don’t expect to see this happening until the end of 2024 or 2025.

“That’s why my Committee has asked the Government to look at introducing a social tariff, as a more effective method of price regulation to help low income households.”

The regulator's chief executive warned that the increase to the price cap in October will go "over and above the estimate that we made in May". 

READ MORE: Energy prices: Ofgem unveils new rules to protect consumers

Ofgem's Jonathan Brearley said: “I know this situation is deeply worrying for many people. As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably.

“The trade-offs we need to make on behalf of consumers are extremely difficult and there are simply no easy answers right now. Today’s changes ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also, that it can adapt to the current volatile market.

“We will keep working closely with the Government, consumer groups and with energy companies on what further support can be provided to help with these higher prices.”

Mr Brearley later confirmed to BBC Radio 4’s Today programme that Ofgem was looking at taking money off standing charges, but warned that trade-offs were involved and “there aren’t easy answers in the market right now”.

Referring to his prediction in May that Ofgem was expecting an energy price cap in October “in the region of £2,800”, he said: “I would say that it’s very clear that we expect significant increases again in prices, even over and above the estimate that we made in May. And that just shows you how dramatically the market is changing.”

Asked about proposals to help customers, such as cutting VAT and green levies, he replied: “There is an almost £40 billion package of measures that are already in place to pay as discounts on our bills, but I think everyone recognises that the market has fundamentally changed since that package was announced, which was only two months ago, so every politician will be thinking about how they can mitigate that.”

He added: “I think we all recognise that more will need to be done.”

Bills could hit a staggering £3,359 per year from October for the average household, and not fall below that level until at least the end of next year, the Cornwall Institute suggested. 

The price cap on energy bills, which regulates what 24 million British households pay, will hit £3,616 from January and rise further to £3,729 from April, it said.

It will only begin to slowly fall after that, reaching £3,569 from July before hitting £3,470 for the last three months of 2023.

National Energy Action director of policy and advocacy Peter Smith said: “Ofgem moving ahead now with passing price cap changes on to households quarterly rather than every six months wasn’t necessary and unfortunately means further significant price increases in January are inevitable.

“Average annual bills are already predicted to increase by £1,200 a year – a 177% increase since last October. Now, householders can expect further hikes just after Christmas, in the middle of heating season when energy costs are typically at their highest.

“January is also usually a time of increased mental health problems and further hikes in bills will sadly lead to increased misery and huge anxiety for energy consumers across Great Britain, particularly for the poorest households. It’s disappointing that Ofgem has not listened to these concerns. They could have used their discretion to offset this avoidable outcome by starting the reforms in April when energy demand starts to fall.

“This change also strengthens the growing calls for deeper price protection for the poorest households, something Ofgem can and must help support.”

Gillian Cooper, head of energy policy at Citizens Advice, said: “Something that’s added to all our bills is the cost of supplier failures. Changing to a quarterly price cap should limit the risk of any more suppliers going bust, which is a good thing. But our bills are already incredibly high and still rising.

“The Government was right to bring in financial support for people, but it may not be enough to keep many families afloat. It must be ready to act again before winter draws in.

“Ofgem must make sure suppliers are helping customers who are struggling to pay. It should hold energy companies to account so people aren’t chased by debt collectors or pushed onto prepayment meters when they can’t keep up with bills.”