Britain’s energy regulator sought on Friday to quell growing concern over soaring electricity and gas bills by announcing a package of proposed reforms including quarterly changes to the price cap and tougher rules for new suppliers.
Ofgem, which on Thursday announced the latest increase in the cap, is facing a growing outcry over its handling of an energy crisis that will push up household bills by 54 per cent in April. The regulator wants to adjust the price cap more often so that any increase in wholesale prices can be passed on to households more quickly.
More than half of all energy suppliers — or 28 companies — have gone bust since August, affecting about 4m households and adding to the rise in household bills as bill payers shoulder some of the costs of the collapse.
Ofgem warned that “volatility in the gas market is not over” and that suppliers would need to “ensure that they are continuing to manage risks to avoid further financial distress and potential insolvencies”.
Ofgem calculates the cap, which is updated twice a year, using a formula that includes wholesale energy prices, energy suppliers’ network costs and costs of government policies such as renewable power subsidies.
However, it is planning to adjust the formula “to ensure that the cap better reflects the costs of supplying energy, as well as decisions in response to the recent wholesale market volatility and to allow the cap to respond flexibly to exceptional or unprecedented market changes in the future”, Ofgem said.
The proposals follow an outcry from consumer protection and anti-poverty campaign groups on Thursday after Ofgem announced that under the new cap, which will come into effect from April 1, households will pay nearly £700 more on average or a maximum of £1,971 a year. It is likely to rise further in the autumn.
On Thursday UK chancellor Rishi Sunak unveiled measures to try to mitigate the price increase, including a “discount” of £200 that will be spread over customer bills in the coming years and a temporary £150 rebate on council tax for most households.
The cap was introduced by Ofgem in 2019 at the request of Theresa May’s government to keep a lid on energy bills. Suppliers have complained that the twice yearly adjustments — in April and October — mean they have been unable to pass on the sharp increases in wholesale gas prices in recent months.
The regulator said it would also strengthen requirements for new entrants to the market. Many of the suppliers that have gone bust were poorly capitalised and did not have long-term energy contracts, known as hedges, in place so were reliant on buying energy at “spot” or daily rates. The largest to fail so far has been Bulb, which was Britain’s seventh-biggest energy supplier with 1.5m customers.
Citizens Advice has accused Ofgem of allowing “unfit and unsustainable energy companies to trade with little penalty”. Rules that were introduced to protect customers were not enforced, leading to a culture where “companies were free to flout the rules”, it said.