The energy price cap is set to be lifted to help suppliers recover a record £3bn of bad debt accrued through unpaid gas and electricity bills, the industry regulator has announced.
Ofgem said on Friday it was consulting on proposals for a one-off cap adjustment of £16 – equivalent to around £1.33 a month – to be paid between April 2024 and March 2025.
Those on pre-payment meters would not be affected by the plan, the watchdog said, adding the sum it wanted to impose on households was down on an initial proposal of £17.
The energy watchdog said the £3bn debt pile was a result of the impact of the energy-driven cost of living crisis on household budgets.
“The scale of this debt means that it is crucial that suppliers have sufficient funding to ensure they can meet the strict regulations Ofgem has in place around how they treat customers facing payment difficulties.
“This adjustment to the price cap will ensure suppliers have the resources to support customers struggling with debt.”
Ofgem is anxious to avoid a repeat of severe financial pressure on many suppliers after dozens, including Bulb, collapsed amid a spike in wholesale energy costs in 2021.
That crisis added about £82 to every single customer’s bill at the time, as companies with more robust business models were appointed to take on the households left stranded.
3:57 Energy price cap to rise in JanauryThe price cap, which has come down since the unprecedented bills witnessed last winter, not only reflects market prices but also contains other mechanisms to allow firms to recover limited costs.
AdvertisementEnergy supplier profits have been elevated this year due to Ofgem allowing firms to recover from deep losses.
They were incurred through the purchase of additional wholesale energy to cover the additional customers taken on during the period when rival suppliers collapsed.
The UK’s biggest supplier, British Gas, reported record profits of £969m for the first six months of 2023, up almost 900% from £98m in the same period of 2022.
Meanwhile, French state-owned EDF reported its UK business made profits of almost £2bn for the first half of last year – including the earnings from its nuclear power plants – up from £738m in the same months of 2022.
Scottish Power reported a £576m profit for the first half of the year and E.On made £723m. SSE reported pre-tax profits of £565.2m for the first half of the year.
Simon Francis, coordinator of the group End Fuel Poverty Coalition, argued it was unfair for the regulator to make the majority pay for a failed system.
“This outrageous tax on energy consumers is simply not fair,” he said.
“Energy suppliers have posted billions in profits already this year while millions of people struggle in cold damp homes.
“The record levels of energy debt are due to Britain’s broken energy system, not the fault of the hard-pressed public.
“We have called for the government to introduce a help to repay scheme for homes in energy debt. But ministers have refused to listen and now customers will pay the price of their inaction.”
Tim Jarvis, Ofgem’s director for markets, said: “We know that cost of living pressure is hitting people hard and this is evident in the increase in energy debt reaching record levels.
“We have taken steps to ensure energy firms are taking better care of customers and treating people struggling with debt fairly, through our robust consumer standards, and that companies are getting in touch to offer support, such as affordable payment plans, where needed.”
Read more:Energy price cap to rise in JanuaryBritish Gas profits up by almost 900%
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He added: “However, the record level of debt in the system means we must take action to make sure suppliers can recover their reasonable costs, so the market remains resilient, and suppliers are offering consumers support in managing their debts.
“The proposals set out today are not something we take lightly. However, we feel that they are necessary to address this issue. This approach will ensure the costs are recovered fairly, without penalising a particular group of customers.
“The price cap has helped to protect consumers from a volatile gas market. However, it remains a blunt instrument in a changing energy sector, and the way it works may need to change in the future, so customers continue to be protected.”
Ofgem said action to help those struggling to pay their bills this winter, which came into force on Thursday, included rules on the offer of debt repayment plans and holidays.