Ofgem confirmed yesterday that it will review the energy price cap four times a year rather than twice yearly, in a move campaigners warn will push up energy bills.
The energy regulator said “the price cap will have to increase to reflect increased costs” and that “customers face a very challenging winter ahead”.
Analysts have warned energy bills could climb above £4,000 within the next year, as a result of the switch to quarterly price cap reviews, resulting in criticism from campaign groups.
Peter Smith, director of policy and advocacy at National Energy Action, said: “Ofgem moving ahead now with passing price cap changes on to households quarterly rather than every six months, wasn’t necessary and unfortunately means further significant price increases in January are inevitable.
“Average annual bills are already predicted to increase by £1,200 a year – a 177% increase since last October. Now, householders can expect further hikes just after Christmas, in the middle of heating season when energy costs are typically at their highest.”
National Energy Action’s research suggests that 8.4 million UK households will fall into fuel poverty as a result of the surging price of fuel, as under the latest predictions for October’s price cap, monthly payments will have risen 160% within a year to £290.
Smith lashed out at Ofgem for making the switch before the winter period, when energy demand will surge, instead of starting the reforms in April “when energy demand starts to fall”.
Analytics firm Cornwall Insight predicts that the average energy bill could reach £3,359 after the current price cap ends in October.
Martin Young, an analyst at Investec PLC (LSE:INVP), has warned that energy bills could climb even higher, and exceed £4,000 within the next year.
Ofgem claims the switch to quarterly price cap reviews will reduce the risk of further energy company failures as suppliers fail to meet the price cap amid rising wholesale prices: “It is not in anyone’s interests for more suppliers to fail and exit the market.”
In a footnote yesterday, Ofgem said the price of energy will be so much higher this winter than ever before that suppliers paying winter prices but charging customers annual prices “will never get back the difference” without an increase in the price cap.
Rather than reviewing the limit on energy prices every six months, Ofgem will now look to review the threshold at quarterly intervals.
Jonathan Brearley, chief executive at Ofgem, said: “As a result of Russia’s actions, the volatility in the energy markets we experienced last winter has lasted much longer, with much higher prices than ever before. And that means the cost of supplying electricity and gas to homes has increased considerably.”
The price cap was introduced into law in 2018 to set a maximum amount suppliers can charge per unit of energy, designed to cap suppliers’ profits at 1.9%.
However, huge profits in the energy sector for the likes of BP PLC (LSE:BP.) and Centrica PLC (LSE:CNA) have created a backlash with MPs accusing them of feasting on a "profits bonanza".
As of July 2022, about 24 million energy customers on a standard variable tariff were subject to Ofgem’s price caps, plus 20 million default customers and 4 million default prepayment meter customers.