Ofgem announces price cap frequency change
What is the price cap?
The energy price cap was introduced on January 1st 2019 by the regulator Ofgem. The aim of this price cap was to protect the millions of households in the UK from variable tariffs that could be used to profiteer.
Variable tariffs are generally used when a customer comes to the end of their original energy agreement but do not shop around for a newer, better deal.
The energy price cap limits how much you can pay for each unit of gas and electricity that you use whilst also setting a maximum daily standing charge. The price cap is based on the current wholesale price of energy.
The price cap only allows for a 1.9% supplier profit margin point to prevent excess retail profits.
So what is changing?
Ofgem are changing the frequency of how often they update this energy price cap from every 6 months to every 3 months. But what does this mean?
Ofgem states on their website that “Ultimately energy has to be paid for in full and the price cap has to reflect the costs to the supplier of buying it wholesale and supplying it to homes, which makes up most of people’s bills. The price cap is also not a cap on the maximum bill a household can be charged, which is based on their usage.”
The changes are designed so that Ofgem may react faster and do not lag behind a very quickly changing market.
How does it affect you?
Unfortunately, there is not much Ofgem can do except ensure energy suppliers do not profiteer as prices of wholesale energy continue to increase by updating the energy price cap to ensure profits remain at no more than 1.9%.
Jonathan Brearley, CEO of Ofgem commented:
“I know this situation is deeply worrying for many people. As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably.
“The trade-offs we need to make on behalf of consumers are extremely difficult and there are simply no easy answers right now. Today’s changes ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also, that it can adapt to the current volatile market.
“We will keep working closely with the Government, consumer groups and with energy companies on what further support can be provided to help with these higher prices.”
According to the latest predictions (Tuesday 2nd August) from analysts at Cornwall Insight energy prices are strongly predicted to increase by a further 70% to £3,359/year in a typical use scenario.
Should you be struggling with the increase in energy prices, you may be eligible for support:
Warm Homes Discount: Warm Home Discount Scheme: Overview - GOV.UK (www.gov.uk)
Energy Bills Support Scheme: Energy Bills Support Scheme explainer - GOV.UK (www.gov.uk)