UK energy regulator to take ‘bold action’ on price caps as crisis deepens

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Britain’s energy industry regulator is set to take ‘bold steps’ to revise price caps protecting millions of households from soaring bills as suppliers face a worsening energy crisis this year. winter.

In an open letter to the industry, Ofgem promised to open a consultation on how the energy price cap is calculated as early as next month to ensure it allows suppliers to recoup their costs.

The regulator did not suggest any specific changes in the letter, but the industry should take the opportunity to request that the price cap, which only changes twice a year, be more responsive to market fluctuations by also changing. often only once every quarter.

“These are tough times, requiring bold action,” wrote Jonathan Brearley, Chief Executive Officer of Ofgem.

Quick guide

What is the UK energy price cap and how does it work?

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How does the energy price cap work?
The cap, one of the biggest upheavals in the energy market since privatization, went into effect on January 1, 2019 for 11 million households on default tariffs, called standard variable tariffs (SVT). The government asked energy regulator Ofgem to set the cap because ministers argued that people on SVTs were getting ripped off by big energy companies capitalizing on consumer loyalty. The limit is not absolute but the maximum that suppliers can charge per unit of energy and for a permanent fee. There is a separate ceiling for 4m houses on prepaid meters.

So why are the prices going higher?

In short: if the energy market prices rise higher, the ceiling must also rise. The cap is designed to reflect the costs that energy providers face, the most important of which is the supply of gas and electricity to wholesale markets. In recent months, energy markets have hit all-time highs due to tight global gas supplies, triggering one of the largest energy price hikes on record. Market prices have continued to climb since the announcement of the new cap, meaning another hike is likely in April once the regulator revises its cost estimates.

Is there a way to avoid the increase?

In the past, households could save hundreds of dollars a year by spending a few minutes on one of the many comparison sites, or signing up for an automatic switching service, and switching to a cheaper rate, either with their existing supplier or with a rival. But the recent surge in the market means that even fixed tariffs, which are not covered by the cap, are more expensive than the energy price cap itself. The best bet for controlling bills is to use less energy: if you can afford to invest in insulation, it can make a big difference in how much energy you need. Lowering the thermostat a few degrees may also be an option for some.

When will the bills start to go down again?

It is too early to tell. Energy market experts believe wholesale gas and electricity prices will remain high through the winter and into 2022 as energy demand recovers quickly from the worst of the world. Covid-19 crisis. Some believe that households could face an increase in their energy bills for another 18 months. In addition to market prices, the regulator includes the cost of using energy networks and paying for government policies – which are also expected to continue to rise.
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This would be the first major change to the price cap, which was introduced in early 2019 to protect households from unfair energy bills with a cap based on the costs of purchasing and supplying gas and electricity. .

The energy crisis, which has resulted in record prices in the world market, has caused these costs to exceed price cap updates, causing the collapse of 13 energy suppliers in the past seven weeks, and many more are expected to follow this winter.

Along with Ofgem’s plan to change the price cap, it will also begin to “raise the bar” on its standards for energy supplier finances to ensure they deliver “a sustainable business model” that minimizes risks to consumers.

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Ofgem also intends to underline its expectations on the way in which suppliers should help households struggling to pay their bills by offering debt repayment plans or other financial support “to their most vulnerable consumers”.

Brearley said that “the unprecedented and unexpected rise in gas and electricity prices in recent months has strained energy markets.”

He said: “As this period of uncertainty continues and the pressure on the industry increases, we are taking steps to protect the short and long term interests of consumers, providing greater certainty to investors and strengthening the resilience of the sector. ”

The regulator plans to consult on the changes in November and expects to make the changes as early as February before the next energy price hike scheduled for April. Up to 15 million homes faced one of the largest bill increases on record this month after Ofgem lifted the standard rate cap by around 12.5%.

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