Regulator opens up the conversation around the future
of price protection as the energy market continues to
evolve
A consultation on how to develop the price cap so customers
remain protected as the energy market evolves to a smarter, more
flexible system has been launched today by Ofgem.
The price cap, along with the temporary ban on acquisition-only
tariffs, have 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 that were a result of the energy crisis.
But energy retail markets are changing as increasing numbers of
consumers change their energy consumption and begin using
electric vehicles, heat pumps, and solar panels. Our increasingly
renewables-dominated electricity sector will also reward
consumers for shifting the time of their electricity consumption,
which will in turn reduce costs for everyone.
As customer diversity grows, and more households adopt
time-of-use tariffs, it could become harder to retain a universal
price cap that is suitable for everyone.
So, the energy regulator is considering how the price cap, and
energy regulation as a whole needs to adjust to ensure customers
are protected, they continue to pay a fair price for their
energy, and they get to realise all the benefits of net zero.
To inform that work, it has published a discussion paper on the
future of price protection. It complements a Government Call for
Evidence (CFE) on default tariffs published in February.
The introduction of half hourly settlement from 2025 means
customers will have more flexibility in how they use and pay for
electricity, and is expected to lead to a growth in smarter time
of use tariffs that reward customers for being more flexible in
their energy usage. This will allow consumers to benefit from
cheaper energy when renewable generation increases such as when
it is particularly windy or sunny.
As part of the discussion paper, Ofgem has set out a range of
options for the future of the price cap, including:
- introducing a more dynamic cap with time-of-use dependent
unit rates to encourage consumer flexibility.
- introducing a targeted cap which could be based on a variety
of factors such as vulnerability
- introducing 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
While price protection will remain an important part of the
energy market, Ofgem is asking charities, consumer groups,
businesses, bill-payers and suppliers for their views, and
proposals for future alternatives.
This discussion paper is part of a wider package of work from the
regulator to review current arrangements in the retail market to
make sure it works for all consumers including those who struggle
the most, and follows the publication of a call for input to
examine issues around affordability and debt in the energy market
last month. Ofgem is also currently reviewing over 30,000
responses to its call for input on standing
charges which closed in January.
Tim Jarvis, Ofgem’s 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.
“We will continue to work with government, industry, consumer
groups, charities and the public on the future of pricing
regulation. Our aim is ensure the market works for
everyone.”
Ofgem has also set out its Price Cap programme of work that it
intends to carry out over the next two years which will focus on
whether to levelise bad debt charges between direct debit and
standard credit customers, reviewing suppliers' operating costs
and how these are reflected in the price-cap level, and further
balancing of the 'bad debt' related costs adjustment.
Last month the Department for Energy Security and Net Zero
(DESNZ) also published a Call for Evidence to
explore how default tariffs may evolve as the market changes,
particularly exploring the fairest ways to protect domestic
customers in a world of more flexible energy pricing.
Notes to editors
We welcome the views of all stakeholders to be sent to future_price_protection@ofgem.gov.uk
by Monday 6 May, 2024.
