Dermot Nolan has warned that there could be a “significant” jump in the level of the price cap when it is reviewed next month.
The cap on standard variable tariffs is due to undergo its first half yearly review in February.
This exercise will fix the level of the cap, which was introduced at the beginning of this month at a level of £1,137, for the six months from April.
Outlining Ofgem’s future work programme at the regulator’s “Energy of the Future” conference yesterday (10 January), its chief executive Nolan said: “Wholesale costs have risen significantly over the past year. As a result, it is likely we will announce an increase, potentially a significant one, on the level of the cap.”
Any increase would reflect the “actual costs of supplying energy”, rather than firms profiteering, he added.
Wholesale energy costs, which saw a sharp rise in the second half of 2018, are one of the chief factors that contribute to the level of the cap in Ofgem’s methodology.
Responding to questions later during the conference, energy minister Claire Perry insisted that consumers on tariffs covered by the cap would still be “tens of pounds” better off than if it had not been introduced.
She was backed up by Ofgem chair Professor Martin Cave.
He said: “Where world energy prices are rising, we can’t just freeze the cap. We need to explain to consumers that they are still getting a fair price and any basic price will reflect the underlying costs of their energy.”
During her keynote speech to the conference, Perry said she expected to see further failures of energy suppliers.
She said: “The nature of markets means that there will be winners and losers: this sector is no different. We have seen particularly challenging market conditions and a number of suppliers exiting and I feel there will be more to come.”
The minister also told delegates that there is “no single right answer” for decarbonising the heat network, which is currently dominated by natural gas.
She said: “I’ve seen so many theoretical pathways suggesting that the entire network will be dismantled but not seen any modelling who would bring forward that network or indeed the new appliances that would be required.”
And the transition to a “smart” energy system should not be at the expense of lower income consumers, Perry said: “We have to create a level playing field and ensure that all parts of the UK benefit from that shift and that regardless of income households can take control of their energy use.”
Joanna Whittington, the recently appointed director general, energy and security at the Department for Business, Energy and Industrial Strategy, said the government would not accept poorer and less technologically savvy consumers paying higher bills than those able to take advantage of the money saving opportunities created by the new smart energy system.
She said: “I don’t think ministers would find it an acceptable starting point that benefits accrue to those who arguably need them least first and not those who need them most first.
“The license to operate and legitimacy to operate needs the industry to think very differently this time around about how benefits are rolled out across the system.”