Ofgem confirms price cap to be updated quarterly ahead of ‘challenging winter’

Ofgem confirmed that the energy price cap would be updated quarterly rather than every six months as it warned customers were facing a “very challenging winter”.

The regulator said the change would “in some way provide the stability needed in the energy market,” adding: “It is in no one’s interest that more suppliers fail and leave the market.”

It says that Russia’s actions in Ukraine have caused the volatility in the global energy market, which was observed last winter, to last “much longer, with much higher gas and electricity prices than ever before.”

As expected, Ofgem warned that as a result of market conditions, the price ceiling should be increased later this month to reflect higher costs.

However, it says the changes will mean that any drop in wholesale prices will be passed on to customers in full and faster with a quarterly price cap.

Ofgem chief executive Jonathan Brearley said: “I know this situation is deeply disturbing to many people. As a result of Russia’s actions, the volatility in energy markets that we experienced last winter lasted much longer and prices were much higher than ever before. This means that the cost of supplying electricity and gas to homes has increased significantly.

“The trade-offs we need to make on behalf of consumers are extremely complex and there are simply no easy answers right now. Today’s changes ensure that the price cap is doing its job, ensuring that consumers only pay the real cost of their energy, as well as being able to adapt to current market volatility.

“We will continue to work closely with the government, consumer groups and energy companies on what additional support can be provided to help with these higher prices.”

The latest projections suggest price caps will change as household electricity bills are likely to remain at more than two and a half times their pre-crisis levels until at least 2024.

Cornwall Insight, one of the country’s most respected energy consultancy firms, said bills for the average household will total a staggering £3,359 a year from October and will not fall below that level until at least the end of next year.

The price cap on electricity bills, which governs what 24 million UK households pay, will hit £3,616 from January and rise to £3,729 from April, it said.

After that, it will start to fall, but very slowly, reaching £3,569 in July and then hitting £3,470 in the last three months of 2023.

The latest forecasts are hundreds of pounds higher than previous forecasts by Cornwall Insight, but slightly below those of other consulting firm BFY.

In May, the government announced a £400 per family electricity cost support package in response to forecasts that bills would rise to £2,800 for the average family in October.

The package also promised additional support for more vulnerable households.

Last month, Cornwall Insight predicted that annual electricity bills would typically rise to £3,244 from October and £3,363 from January, but the circumstances have changed significantly since then.

The latest forecasts come after the Kremlin further cut off the flow of gas to Europe.

Although the UK receives very little gas directly from Russia, the price paid here is determined by what happens on the continent.

If the predictions come true, they will put enormous pressure on already cramped households.

This would nearly double today’s record price of £1,971, already hundreds of pounds more than the previous high.

While it’s too early for a January forecast, analysts already have most of the data they need to accurately predict October growth.

National Energy Action policy and advocacy director Peter Smith said: “Ofgem is moving forward with the introduction of quarterly price cap changes for households rather than every six months, which is unnecessary and unfortunately means that further a significant rise in prices in January is inevitable.

“It is already projected that average annual bills will increase by £1,200 a year, up 177% from last October. Homeowners can now expect a further increase just after Christmas, in the middle of the heating season, when energy costs tend to be at their highest.

“January is also usually a time of increasing mental health issues and further increases in bills will unfortunately lead to more misery and huge anxiety for energy consumers across the UK, especially for the poorest households. It is disappointing that Ofgem has not heeded these concerns. They could have used their discretion to offset this outcome, which could have been avoided by launching reforms in April when energy demand began to fall.

“This change also reinforces growing calls for deeper price protection for the poorest households, which Ofgem can and should support.”

Gillian Cooper, head of energy policy at Citizens Advice, said: “The cost of supplier failures is added to all of our bills. Moving to a quarterly price cap should reduce the risk of other suppliers going bankrupt, which is a good thing. But our bills are already incredibly high and growing.

“The government did the right thing by providing financial support to the people, but this may not be enough to keep many families afloat. He must be ready to act again before the winter comes.

“Ofgem needs to make sure suppliers help customers who are having difficulty making payments. He needs to hold energy companies accountable so debt collectors don’t harass people and push them to prepaid meters when they can’t pay their bills.”