Ofgem mulls big energy price cap changes, which could see bills fall

Energy bills could become cheaper for more than 90 percent of the country under plans to suspend the price cap being considered by regulator Ofgem.

These include limiting the profits energy companies can make on more expensive capped tariffs – or even abolishing them altogether.

The price cap limits how much energy companies can charge for units of gas and electricity for customers on variable rates who pay by direct debit.

The average price cap bill for two fuels is £1,928 per year, falling to £1,690 per year from April 1.

Most households now pay capped bills as energy companies have severely limited the number of cheaper fixed rates available.

Ofgem has today published a consultation paper on the future of its price cap.

Ideas Ofgem is considering include:

• Having more than one price limit depending on the time of day;
• Having different price ceilings for groups such as vulnerable consumers or consumers with prepayment meters;
• Linking how much an energy company can charge for its ‘standard’ tariff (usually the price cap level) to the price of cheaper energy deals they offer;
• Limiting the profit that energy companies can make with tariffs with a maximum price;
• Completely abolish the cap and replace it with rules that mean energy companies cannot offer cheaper deals to new customers unless they also offer them to existing customers.

Ofgem said it wants to hold a debate on the price cap to ‘ensure customers are protected, that they continue to pay a fair price for their energy and that they can realize the full benefits of net zero’.

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For example, the regulator expects a greater shift to time-of-use electricity rates, which are currently rare.

The government also wants more electricity to come from renewable sources whose supply can vary, such as wind or solar energy.

Ofgem thinks the price cap could reflect this, for example by offering a cheaper rate for electricity used outside peak times.

Critics of the price cap – including Ofgem itself – say it has led to higher bills for millions as energy companies have little incentive to bring back deals that are cheaper.

Richard Neudegg, regulatory director at Uswitch, said: ‘Nearly three years after the start of the energy crisis, we are yet to see a full return to market competition – and the price ceiling must bear some of the blame.

‘We support Ofgem’s position that the price cap should be reformed as it has been shown to have significant limitations.

‘The devil is in the detail, but it is crucial that any changes to the cap create the conditions to deliver better deals for consumers, as well as provide targeted protection for the most vulnerable.’

Ofgem director general of retail and markets Tim Jarvis said: ‘We look in detail at the elements of the price cap that have worked well and the challenges we have identified in recent years, while also considering how a large number of future consumers will use and pay for energy, to ensure 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 price regulation. Our goal is to make sure the market works for everyone.”

Why does Ofgem’s price cap matter?

The price cap was introduced in January 2019 to prevent energy companies from overcharging their customers with variable rates.

At the time, most households had fixed-rate energy contracts and only switched to variable-rate rates if they did not renew at the end of their term.

But after energy bills started to rise in late 2021, gas and electricity companies responded by withdrawing all new fixed rate deals from the market.

They did this to try to prevent the widespread collapse that affected many power companies, which were suddenly forced to sell power for far less than it cost them to buy it.

As cheap fixed rate deals virtually disappeared, almost all homes ended up on variable rates, regulated by the Ofgem price cap.