Ofgem confirms power to amend price cap if necessary

It means they now have the option to amend the cap outside the two usual assessment periods if they need to.

They have developed a framework to assess when it might be necessary, although they concede many consultation responses were against the proposals.

Other documents published by Ofgem include proposals to change the way the cap is handled from October 2022 onwards.

Credit: chrisdorney/Shutterstock.com

New framework

Ofgem have decided to introduce a new framework that would allow them to make changes to the energy price cap outside of the usual cap periods.

It would mean they could respond to unforeseen events such as the wholesale price of energy more rapidly and potentially avoid the type of crisis that has seen dozens of energy suppliers collapse over the last six months.

Instead of putting strict metrics in place to decide when they should step in, Ofgem have created a set of five tests that can help them assess circumstances when they arise:

1. The event must be rare in either nature or scale.
2. It must be caused by something external to energy suppliers themselves.
3. Suppliers must not be able to reasonably avoid it.
4. The event must impact the efficient costs of supply and so stepping in would be appropriate.
5. It requires urgent action by Ofgem to mitigate the impact on the market and consumers and avoid potential long-term or enduring effects.

Ofgem say this framework will enable them to react to exceptional circumstances and any changes that take place within a cap period will only apply until the end of that cap period.

As an example, if Ofgem decided to step in urgently in August 2022, the decision they made would only apply until 1 October 2022 when the next scheduled cap assessment would be due to come into force - it wouldn't just roll forward into another cap period.

Consultation

Ofgem first announced they were consulting on this issue in November 2021 and their final decision includes details of some of the responses they received.

The proposals were not popular, with 50% of energy suppliers, consumer organisations and trade bodies who replied disagreeing with them.

More importantly, a petition website garnered responses to the proposals and 86% (34,000) said Ofgem should not change the cap more frequently than every six months.

Respondents cited the fact changing the cap outside the schedule could lead to more uncertainty and there was criticism about the lack of clear guidance on how Ofgem would make their decisions.

Nevertheless, Ofgem have now decided to press ahead with the changes as initially proposed, giving them the power to alter the cap outside the current schedule.

Future changes

Ofgem also launched another consultation to look at changing the energy price cap's methodology in the medium term.

While conceding there is no perfect solution to dealing with the ongoing volatility in the energy market, they set out three options:

1. Reduce the notice period when setting the cap from two months to one month. This would allow the cap to reflect the circumstances more closely at the time it is brought in rather than running two months behind. Currently, for example, the changes are announced in August to come into force in October. This delay would be reduced.
2. Update the cap quarterly rather than bi-annually with a one-month notice period. This would mean the cap is reassessed more regularly. A four-month cap period is also an option.
3. Create a Price Cap contract for either six or twelve months without exit fees. This would create six or twelve price cap levels that would be updated on a rolling cycle with one closing to new customers at the end of one month and another opening to new customers at the beginning of the following month. Ofgem concede this would have complexities around implementation.

There's a lot to digest in Ofgem's consultation and it will be interesting to see what responses consumer groups put forward as well as energy suppliers and associations.

Their preferred option is to move to quarterly cap updates and they would look to start that new schedule from October 2022.

At first glance, changing the price cap more regularly could appear to be detrimental to customers, especially when coupled with the decision we've detailed above to give Ofgem the power to effectively change the cap at will if things get bad enough.

It's worth noting the energy price cap hasn't always increased and it can go down as well as up, as we saw in October 2020 when it fell for the third consecutive time.

Yet energy customers are understandably angry right now following a £693 rise in the cap level from April 2022 and suspicious that any extra powers given to Ofgem to amend the price cap more regularly will just lead to bills going up rather than down.

The regulator is collecting consultation responses until 4 March 2022.