Ofgem boss Jonathan Brearley has told MPs the regulator expects the price cap to increase by more than £800 this October as the war in Ukraine continues to exacerbate the energy crisis.
Brearley revealed the forecast whilst appearing before the Business, Energy and Industrial Strategy (BEIS) Committee on Tuesday (24 May) alongside Ofgem’s director of retail Neil Lawrence and its strategy and decarbonisation director Neil Kenward.
The regulator’s former chief executive Dermot Nolan was also grilled by MPs earlier in the day.
Brearley began by saying conditions in the global gas markets have worsened since the Russian invasion of Ukraine, with gas prices “higher and highly volatile”.
He added: “At times they have now reached over 10 times their normal level. Now I know this is a very distressing time for customers, but I do need to be clear with this committee, with customers and with the government about the likely price implications for October.
“Therefore later today I will be writing to the chancellor to give him our latest estimates of the price cap uplift. Now this is uncertain, we are only part way through the price cap window, but we are expecting a price cap in October in the region of £2,800.”
If the regulator’s latest estimate were to materialise, the default tariff cap would have increased by more than £1,500 since last October, having already risen from £1,277 to £1,971 per year in April.
There are currently around 6.5 million people estimated to be in fuel poverty and the Ofgem chief was later asked what percentage of customers will be fuel poor should the cap reach £2,800.
“The best number we have, if you accept all the caveats that I am not even going to run through, is around 12 million households,” he said.
The session saw both the current and former Ofgem chief executives apologise for not intervening in the retail market sooner to prevent widespread supplier failures.
Nolan disputed a comment made by committee chair and Labour MP Darren Jones regarding a sense of “intense relaxation” at Ofgem over many years.
However, he did accept that the regulator should have been more proactive in making changes and that the system of monitoring firms was not enough.
He said: “I do accept that we should have moved more quickly in the last year or two to deal with the kind of shocks. I deeply regret that but I probably don’t accept the overall characterisation, but I do wish we had moved more quickly and I do apologise to you for that.”
Brearley said the surge in gas prices over the last year is a “once in a generation event” that has not been seen since the oil crisis in the 1970s.
He added: “In any conceivable circumstances there would have been supplier failure. However it is clear to me, and it is clear to the current Ofgem board, looking over all of our institutions’ history, that had financial controls been in place sooner we’d have likely seen fewer suppliers exit the market and for that, on behalf of Ofgem and its board, I would like to apologise.”
Brearley was additionally challenged on Ofgem’s market stabilisation charge, a new measure which requires suppliers to pay out to the losing company when they acquire a new customer but only if wholesale prices fall significantly below the level assumed in the price cap.
He said: “We think quite simply if we don’t do this we will see more supplier failure and more cost to customers. And remember those costs fall on everybody, particularly on the most disengaged customers, and that’s predominantly the vulnerable customers.
“So we have had to make some very tough decisions. It is really counter intuitive, and you heard my predecessor talk earlier, for a regulator to think about how you have to attenuate competition. But if we don’t do that we think the cost to customers will be much higher than simply letting the market go and we don’t think we’ll leave customers in a stable place.”
Responding to Ofgem’s latest estimate Adam Scorer, chief executive of charity National Energy Action, said the news will “strike terror into the hearts of millions of people” who are already unable to heat and power their homes.
He further called for the introduction of a social tariff.
Scorer added: “The UK government simply must act and use the welfare system and schemes such as Warm Homes Discount to get significant financial support to people before winter. The ambition should be to find ways of covering the entire price increase for people on the lowest incomes.
“But it should do more. It should direct Ofgem to introduce a below market rate social tariff into the energy market as soon as possible, so that the most vulnerable get the greatest protection. It should double its plans to improve the energy efficiency of homes for people in fuel poverty.”
Meanwhile Jess Ralston, senior analyst at the Energy and Climate Intelligence Unit, said: “Insulation is the only way to permanently bring down bills and could start to make a difference for struggling families ahead of this winter.
“Treasury’s objection to greater investment is going to look even more tone-deaf given bills are now set to leap so much higher in October.
“The gas crisis clearly isn’t going away and prioritising insulating both the country and our homes from volatile gas prices and Putin’s interference seems even more urgent than ever.”