The watchdog Ofgem is to consider introducing a new “dynamic” price cap based on the time of day British households use their energy.
The energy regulator for Great Britain launched a consultation on Monday on a range of options for the future of the price cap, including a “more dynamic cap” with “time-of-use dependent unit rates to encourage consumer flexibility”.
Other options include a targeted cap which could be based on a variety of factors such as vulnerability, and more flexible, market-based price protections such as setting a limit between a supplier’s default tariff and tariffs available in the market, capping the margin suppliers are able to make, or replacing the cap with a ban on acquisition-only tariffs.
Ofgem said the price cap, along with the temporary ban on acquisition-only tariffs, had worked well to protect customers from the “loyalty penalty”, where customers on default tariffs paid higher prices, and from the worst of the recent volatile markets and wholesale price surges of the energy crisis.
It said gas and electricity retail markets were changing as increasing numbers of consumers changed their consumption and begin using electric vehicles, heat pumps and solar panels.
The switch also reflects the transition towards greater renewable electricity generation. Suppliers are expected to pass on savings to customers made during periods when cheap wind and solar power are available through time-of-use tariffs. Those tariffs are likely to be dependent on customers owning smart meters, which consumers have been slow to adopt.
One energy supplier source said the switch to green energy presented difficulties in calculating how to hedge against large swings in wholesale prices dictated by changeable weather, potentially pushing up prices.
Tim Jarvis, the Ofgem director general of retail and markets, said: “While the price cap played an important role in protecting consumers from the loyalty penalty that existed before its introduction, the energy market is changing as we move to net zero and we recognise the systems we have in place may need to change too.
“We’re looking in detail at the elements of the price cap that have worked well and the challenges we’ve identified in recent years, while also considering how a wide range of future consumers will use and pay for energy to make sure we develop the right measures that will protect and benefit consumers across the board.”
Richard Neudegg, the director of regulation at the price comparison site Uswitch, said: “It is vital that any changes made to the cap create conditions to bring back better deals for consumers, and also offers targeted protections to the most vulnerable.”
The price cap was introduced in 2019 to protect loyal consumers on default tariffs from being ripped off. The cap is expressed as an annual average bill for a typical household, but is a limit on the amount suppliers can charge for each unit of gas and electricity. In April, it will fall by £238 to £1,690, still far higher than before the energy crisis.
Over the past decade, a string of upstart energy companies challenged the industries’ big beasts, offering deals to switch supplier. However, the mechanism came under fire when nearly 30 suppliers went bust in the first year of the energy crisis, squeezed by the cap as they were unable to pass on rising wholesale gas prices to their customers.
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The cap is now altered quarterly in an attempt to more rapidly reflect changing wholesale prices, but the regulator’s chief executive, Jonathan Brearley, has previously indicated that it needs reform.
Simon Virley, the vice-chair and head of energy and natural resources at KPMG UK, said the impact of the cap had been “effective competition and innovation in the market suffering and switching levels falling off a cliff”.
He added: “As we look to what a future retail energy market looks like – it will be key to balance proportionate consumer protection with incentives for investment and innovation in a smarter energy system that benefits all consumers.”
Some consumers have shown a willingness to shift their energy usage – putting their dishwasher or washing machine on earlier or later than they typical would – in return for rewards. A National Grid scheme, administered by suppliers, paid consumers to cut their electricity usage during key periods of the day to reduce strain on the grid during cold snaps last winter.
PA Media contributed to this report
