Ofgem looking into more 'dynamic' energy price cap

Ofgem announced a consultation to refine the energy price cap on Monday, ibn a bid to ensure ongoing customer protection amidst the evolving energy market landscape.

The energy regulator said the price cap, coupled with the temporary ban on acquisition-only tariffs, had been effective in shielding customers from the adverse effects of the 'loyalty penalty' and volatile market conditions stemming from recent energy crises.

However, with shifting consumer behaviours such as increased adoption of electric vehicles, heat pumps, and solar panels, alongside a growing reliance on renewable energy sources, Ofgem said it was necessary to reassess existing regulations.

As consumer diversity expanded and more households transitioned to time-of-use tariffs, maintaining a universal price cap suitable was said to be increasingly challenging.

Recognising that, Ofgem said it was contemplating adjustments to ensure continued customer protection, fair pricing, and the realisation of benefits associated with achieving net zero emissions.

To facilitate the process, Ofgem released a discussion paper on the future of price protection, complementing the government's call for evidence on default tariffs issued earlier in the year.

The imminent introduction of half-hourly settlement from 2025 was expected to foster growth in smarter time-of-use tariffs, incentivising consumer flexibility and enabling cost savings during periods of high renewable energy generation.

Ofgem said its discussion paper outlined various options for the future of the price cap, including the implementation of a dynamic cap with time-of-use dependent unit rates, the adoption of a targeted cap based on factors such as vulnerability, and the exploration of market-based price protections like capping supplier margins or banning acquisition-only tariffs.

The regulator invited input from charities, consumer groups, businesses, billpayers and suppliers to gather diverse perspectives and proposals for future alternatives.

In addition to the discussion paper, Ofgem said it was reviewing over 30,000 responses to its recent call for input on standing charges, which closed in January.

“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,” said Ofgem’s director general of retail and markets, Tim Jarvis.

“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.”

Reporting by Josh White for Sharecast.com.