‘Things are going to get tougher’, warns energy regulator over fears prices could rise quicker

The energy price cap, the mechanism that determines gas and electricity bills for 22 million households, could soon be reviewed every three months under plans announced by the industry regulator.

Ofgem revealed that it was putting the idea out to consultation after criticism that the present twice-yearly adjustment arrangement – in April and October – had contributed to the failure of suppliers last year at the height of the wholesale gas price shock.

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 latest forecasts suggest bills could rise to almost £2,600 in October when the next price cap adjustment is due – reflecting the impact of Russia’s war in Ukraine for the first time.

Ofgem said its proposals would enable greater agility: allowing bills to rise or decline more quickly but its chief executive admitted during an interview with Sky News that the next movement would be upwards.

“A more frequent price cap would reflect the most up to date and accurate energy prices and mean when prices fall from the current record highs, customers would see the benefit much sooner,” the regulator said in its statement.

“This change would also help energy suppliers more accurately predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures which ultimately push up costs for consumers.”

It has previously admitted that this proposal would have meant prices going up before the recent April rise but the consultation means that no cap adjustment is imminent.

Ofgem said it planned to bring in the changes from October, so households would see no impact from an update until 1 January under the plans.

They also include an effort to ensure that consumers are able to reap the benefits of falling gas prices more quickly, Ofgem added.

But the founder of moneysavingexpert.com, Martin Lewis, said that a requirement by the watchdog for suppliers to pay a market stabilisation charge when acquiring new customers, if wholesale prices fall below a set threshold, was “killing hopes” of firms launching cheaper, fixed-term deals.

He claimed it amounted to an anti-competitive measure that would stop firms undercutting the price cap.

The regulator said its package of measures, such as stress tests for suppliers and more robust scrutiny of supplier business plans would make the system fairer and more robust.

“Ofgem also recently wrote to suppliers to alert them to a series of market compliance reviews to ensure, amongst other things, that they are handling direct debits fairly, and that overall, they are held to higher standards for performance on customer service and protecting vulnerable customers,” it said.

It argued that the cap change should reduce the risk of costs related to supplier failures landing at the feet of bill-payers.

Ofgem chief executive Jonathan Brearley told Sky News it would also mean that bills could go up quicker, but they would also fall more rapidly in reaction to wholesale price shifts.

“Remember that the total cost you pay over the year would be absolutely the same, because that reflects only the cost of the energy that we buy.

“Yes, the price would go up more quickly as prices go up, but equally importantly as those prices come down, then the price cap comes back down again.

“I remember back in the 2010s when people saw their prices go up and were waiting and wondering why prices didn’t come down equally quickly.

“The good thing about the price cap is that we will make sure it only reflects costs, and therefore it only reflects what you need to pay for your energy.”

He added: “With the Russian invasion of Ukraine, we are seeing a sustained increase, a further increase, in gas prices. So, the difficult news I have is that it is likely in October that prices will go up again.”

The energy price cap is the largest single driver of UK inflation, which is tipped by economists to take a leap forwards this week when the figures for April are released.

The price cap surge means the consumer prices index measure could exceed 9% – a 40-year high according to forecasts – from the current 7%.

The Bank of England warned this month that the impact of the growing cost of living crisis risked the UK entering recession by the year’s end, with inflation topping 10%.

The promise of a slump in living standards has prompted calls from business, oppositions parties and unions for an emergency budget.

Boris Johnson promised action within “days” last week but there has been little sign that Rishi Sunak is preparing for further, targeted, support imminently.

The chancellor has refused to rule out the idea of windfall taxes on energy companies contributing to any further taxpayer aid.