WIREDGOV

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 was yesterday launched 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, yesterday 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.