New Price Cap Considered by Ofgem to Reduce Household Bills

Ofgem are considering a change to their price cap; a new system that measures the time of day energy is consumed and factored by consumers vulnerability.

Rethinking the Price Cap

A consultation has been launched concerning the update of the price cap, which is the total amount suppliers can charge their customers for each unit of energy for households on a standard variable tariff.

Just one of the considerations put forward is a ‘time-of-use’ rate that would introduce a targeted cap, based on certain factors like vulnerability, and could also see the capping of profit margins for the suppliers.

With this, Ofgem are reaching out to billpayers, charities, and consumer groups to get a feel for opinions on these alternative strategies.

From the consultation, Ofgem have also announced other factors that may be considered:

  • Having more than one price cap depending on the time of day.
  • Having different price caps for groups such as vulnerable consumers or those on pre-payment meters.
  • Linking how much an energy firm can charge for its ‘default’ tariff (typically the level of the price cap) to the price of cheaper energy deals they offer.
  • Limiting how much profit energy firms can make from price capped tariffs.
  • Scrapping the cap entirely and replacing it with rules that mean energy firms cannot offer cheaper deals to new customers unless they offer them to existing ones too.

What is the Energy Price Cap?

It was first introduced back in 2019 but is in danger of becoming outdated as more consumers sign up to tariffs that reward the time-of-day they consume their energy.

The price cap changes every three months to ensure bills reflect the cost of energy, and in April, will fall to the lowest level not seen for more than two years.

Tim Jarvis, Director General of retail and markets had this to say:

While the price cap played an important role in protecting consumers from the loyalty penalty that existed before it’s introduction, the energy market is changing as we move to net zero, and we recognise that 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 can develop the right measures that will protect and benefit consumers across the board.”

Tim Jarvis, Director General of Retail and Markets, Ofgem

Director of regulation at Uswitch.com, Richard Neudegg has backed Ofgems views:

“We support Ofgem’s view that the price cap needs reform, given it has proved to have significant limitations”

Richard Neudegg, Uswitch.com

Summary

Ofgem are looking to the future of energy consumption and how this impacts the evolution of the energy price cap. Systems that factor in the time of day energy is used and consumer vulnerability could be introduced, with the hopes that people struggling with the unprecedented price of energy bills are getting the support they need the most, through a system that can keep up with the ever changing energy landscape.

For more on Ofgem’s published consultation visit: Ofgem launches discussion on the future of the price cap

Billy Strickland
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