Ofgem chief executive Jonathan Brearley has urged ministers to consider whether the “very broad and crude” price cap is still fit for purpose following the domestic energy crisis, which saw 30 suppliers collapse
The watchdog boss is uncertain the mechanism is functioning as intended, amid concerns the price cap is doing more harm than good for households amid a painful cost-of-living crisis.
“The price cap was designed for a market that was much more stable – so, pre-2020 – and it worked quite well. But in this volatile market, the price cap has costs as well as benefits, so we would welcome a debate on the future of pricing regulation,” he told The Guardian.
London-based think tank, the Centre for Policy Studies, recently published its own findings on the mechanism – warning that the cap was resulting in higher minimum prices for customers rather than protecting non-switching households from suffering hikes in their energy bills as intended.
It also contributed to the industry volatility which saw dozens of small energy firms exit the market, costing households an estimated £2.7bn, because they were forced to sell energy at a loss for months before the price cap was updated.
Bulb Energy, the UK’s seventh largest supplier, fell into de-facto nationalisation for nearly a year – with the energy firm unable to pass on higher wholesale costs to customers, which spiked after post-pandemic demand rebounded.
Following Russia’s invasion of Ukraine, wholesale market reached record highs, pushing up the number of households living in fuel poverty to almost 7.5m, triggering one of the biggest government bailouts since the financial crisis as ministers handed £78bn to households to help pay their bills.
Brearley was now open to a “more rigorous framework” to support households, paving the way for a shake-up of Britain’s energy market.
Price cap is here to stay, experts warn
The energy price cap was legislated by the government in 2019, designed to put an end to rip-off tariffs by fixing how much suppliers can charge based on an estimate of their costs, and would require legislative changes to be revoked.
Brearley said: “It’s not for us to decide. It’s ultimately for ministers. But it’s important that collectively we understand that a very broad and crude mechanism is going to have risks as well as benefits.”
Ofgem will update the price cap for the final quarter of the year in less than two week’s time – with Cornwall Insight forecasting that the price cap will fall from its current rate of £2,074 per year to £1,861 per year from October.
This remains well above pre-crisis norms of £1,000-£1,200 per year, with the energy specialist predicting it will remain near £2,000 per year for the next 12-15 months minimum.
Brearley believed the energy market was now fundamentally changed from the one he first sought to regulate when he became chief executive over three years ago – with the regulator bringing in capital adequacy for energy firms and reduce its reliance on customer switching to minimise the risk of further supplier collapses.
“The truth is, in a market that was more stable, the price cap did its job. The way it’s configured right now is one that is hard to adapt to the world changing around us,” he explained.
Ofgem is currently consulting on the prospect of a social tariff – targeted financial relief for vulnerable customers – which would be set below the cost of supplying energy.
The concept has gained traction with anti-fuel poverty groups and suppliers including British Gas owner Centrica and Utilita Energy.
Brearley said: “We work with government on all options, including a social tariff. I think we are clear that a more rigorous framework of providing support for customers is needed. But, in a sense, I accept that the government has a set of dimensions to think about that I don’t have to think about”
When approached for comment, a spokesperson for the Department for Energy Security and Net Zero said: “The government will always ensure the energy market is working for consumers to protect them from sky high bills and that households are getting the best deal. Our consultation on how best to ensure people can access the full benefits of moving to a smarter, more flexible energy system is ongoing.”