The energy price cap, introduced by Ofgem in January 2019 to prevent energy suppliers from charging customers too much for their energy supply, is the maximum amount that a supplier can charge for an average energy consumption. The price cap, therefore, determines gas and electricity prices for 22 million households across the country.
As Sky News reported, ‘The cap, which was credited with shielding families from the worst of the COVID-linked rises in raw energy costs, prevented companies passing on the unprecedented increases to their customers.
It delayed the impact from the most damaging element of the cost of living crisis as households were forced to swallow unprecedented rises in one go, with the average bill rising by 54%, or £693 annually, from April to £1,971.’
The goal of the price cap is to make sure that suppliers treat energy consumers fairly. The price cap is made of:
The standing charge – fixed amount added to the bill daily for the energy supply. It does not change no matter how much energy consumers use.
The price of each unit of energy consumed (measured in p/kWh).
At the moment, Ofgem reviews the price cap every 6 months after analysing the situation on the energy market. Earlier today, however, the regulator suggested that the price cap should be updated every three months rather than every six months.
Starting October, energy bills of UK customers will change every three months. It is in October that the next price cap adjustment is due.
Reasons for the change
It is believed that the current system of adjusting prices twice a year was one of the reasons for many suppliers going bust last year when the wholesale gas prices started hitting record highs.
This year also saw UK suppliers going out of business. ‘On Tuesday 18th January 2022, the first supplier of the year collapsed. Together Energy, and its subsidiary brand Bristol Energy, ceased trading impacting more than 176,000 customers,’ the Energy shop reported. Then, in February, Whoop Energy and Xcel Power announced they were ceasing to trade. Nevertheless, both were relatively small providers. ‘Whoop Energy supplied 50 households and 212 businesses and Xcel Power had 274 business customers,’ the Sun wrote.
In just one year 30 UK suppliers had to stop operating due to rising energy costs. Suppliers, especially smaller ones, have been struggling to cope with increasing wholesale energy prices.
Here is the list of UK suppliers that went bust in 2021:
Simplicity Energy (January 27)
Green Network Energy (January 27)
HUB Energy (August 9)
PFP Energy (September 7)
MoneyPlus Energy (September 7)
Utility Point (September 14)
People’s Energy (September 14)
Green (September 22)
Avro Energy (September 22)
Igloo Energy (September 29)
Symbio Energy (September 29)
Enstroga (September 29)
Pure Planet (October 13)
Colorado Energy (October 13)
Daligas (October 14)
GOTO Energy (October 18)
Bluegreen Energy Services (November 1)
Ampoweruk (November 2)
Zebra Power (November 2)
MA Energy (November 2)
Omni Energy (November 2)
CNG Energy (November 3)
Social Energy Supply (November 16)
Neon Reef (November 16)
Bulb Energy (in administration – November 24)
Orbit Energy (November 25)
Entice Energy (November 25
Zog Energy (December 1).
Besides, a direct consequence of the ongoing energy crisis has been high energy bills of both domestic and business customers. Latest forecasts predict that energy bills of UK consumers could reach almost £2,600 in October. This will come on top of the recent increase of 54%. As Ofgem realises that many might struggle to afford paying this much for their supply, greater agility that the new solution offers would allow for sooner decline to these costs.
Pros and cons of more frequent energy price cap changes
Ofgem believes that the change will ‘make the market fairer and more resilient after a tumultuous period for suppliers and their customers,’ SkyNews reported.
Ofgem says that thanks to updating the prices every three months customers can not only be protected from even higher global gas prices but can also benefit from sudden drops in wholesale gas and power prices.
It will also come with benefits for suppliers who will be able to manage risks in market conditions more effectively.
Jonathan Brearley, chief executive of Ofgem, explained: ‘Today’s 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.’
As for the disadvantages, if there are any other increases to energy prices, customers will feel them much sooner. Consequently, they might have to find themselves seeing their energy bills rising every 3 months. As the wholesale energy prices keep going up and the energy crisis is showing no signs of stopping, it is likely that customers will have to pay more for their energy every time Ofgem reviews the price cap.
Now, they have around 6 months to prepare for having to spend more money on their supply. If they have only 3 months to do so, many might struggle to set aside enough money to pay for their bills.
Reaction
Following the announcement of the changes, Martin Lewis, founder of a consumer advice site MoneySavingExpert, started swearing on a press call with Ofgem. He accused the regulator of not caring about consumers and not doing enough to put an end to the energy crisis. He used explicit language to express his dissatisfaction with the changes and said that Ofgem is ‘a f***ing disgrace that sells consumers down the river.’
According to the Guardian, Lewis said: ‘He said: “I finished the call by asking it to at least consider cutting standard charges, which huge rates stop people really saving by cutting energy use.’
Later, however, Lewis formally apologised to Ofgem for being too emotional. He explained that he got angry because he cares about the wellbeing of energy consumers and that, in his opinion, updating the price cap so often deprives household of the possibility to secure cheap energy deals.