Fears for bills as Ofgem signals energy price cap review
OFGEM has opened the door to a significant relaxation of energy price cap rules, which would expose millions to the risk of sudden price increases.
The regulator signalled last night that it was considering a review of how the energy price cap works after turmoil in the industry triggered by a rise in wholesale prices. The cap prevents energy companies from immediately passing on higher costs to their customers, forcing many suppliers to the brink of bankruptcy.
Speaking at an industry conference held by Energy UK, the trade body, Jonathan Brearley, the chief executive of Ofgem, said: “Although the gas price rise is unprecedented today, we will need to plan on the basis that shocks like this could happen again.”
He said that Ofgem would examine the “wider design and implementation” of the energy price cap, and take an “approach to regulation that is more focused on the business models that enter and operate in our energy market and on the risks that they carry”.
Proposals to water down the cap faced opposition from the Department for Business because of the risk it would pile more pressure on millions of consumers facing a rise in living costs.
A source said Kwasi Kwarteng, the Business Secretary, would resist any attempt to change how often the cap was adjusted, raising the prospect of a row between the regulator and ministers.
Nine energy suppliers have gone out of business since the start of last month because of a rise in gas prices to as much as 11 times normal levels in the wake of the pandemic, with many more feared to go bust within weeks.
Several companies have pushed for a review of the cap, arguing they cannot survive without being able to pass more of the cost on to their customers. Currently the cap is reviewed twice a year.
Ofgem is understood to have ruled nothing out in a review of the cap, including how it is calculated and how frequently it can be adjusted.
If it can be changed more frequently, suppliers would spend less time
shouldering the burden from higher prices, but customers would be more frequently subjected to wild swings in the energy market.
Introduced in 2019, the price cap applies to suppliers’ default energy bills and covers about 15million households. Reflecting higher wholesale costs, it went up by £139 on Oct 1 to push average bills up to £1,277. It is expected to rise again when it is recalculated in April. Experts at Cornwall Insight estimate it could increase by almost £400.
One industry source suggested increasing how often the cap was calculated was the “bare minimum” regulators and politicians could do to help suppliers. Any attempt to calculate it more often is likely to face resistance, however, given it is likely to bring forward the hit to household budgets at a time of wider inflation.
The potential change comes as Angela Merkel faces pressure from Britain to resist being strong-armed by Russia over the start-up of the Nord Stream 2 pipeline. The Kremlin has said putting the pipeline into operation would lower rapidly rising gas prices in Europe in an attempt to pressure the German chancellor to speed up a regulator’s decision.
Although officials have been cautious not to make it look like Russia is blackmailing Europe, Vladimir Dzhabarov, a senior lawmaker, put it bluntly yesterday: “Nord Stream 2 could be operational as early as this year. Otherwise Europe is going to freeze.”
Timothy Ash, at Bluebay Asset Management, said it was the “first time since the Cold War that Russia has been able to manipulate European markets to get what it wants”. “This is Europe on its knees. It has no other way to cover its energy needs,” he said. “Putin played Europe like a fiddle.” Russia supplied 43 per cent of the EU’S imports last year.
Britain is trying to cut its reliance on fossil fuels, with Mr Kwarteng last night confirming plans to decarbonise the electricity system by 2035 by increasing wind and solar power and building at least one more nuclear plant.