Ofgem is pressing ahead with proposals to shorten the price cap period from six months to three to reduce the time lag between changes in wholesale energy prices and their reflection in the cap.
The regulator said its minded-to decision, which is subject to consultation, would allow suppliers to more accurately predict how much energy they need to purchase, reducing the risk of further failures. It said customers would also experience the benefits much sooner when prices fall from their current record highs.
The changes would additionally see a reduced notice period for adjustments to the cap level, which is currently set at two months from announcement to implementation.
Ofgem has proposed to reduce this period to 30 working days – five working days will be used for Ofgem to update the cap level, with suppliers then given 25 working days to update systems and notify customers.
Under the new system, after the next price cap period comes into force on 1 October the regulator will make a further announcement towards the end of November for the following period which will begin on 1 January 2023.
Furthermore, the regulator is proposing to alter the wholesale methodology to include backwardation costs, where short-term market prices are higher than over the long-run. Costs above a £9 ‘deadband’ (£4 for electricity and £5 for gas) would be recovered over 12 months from the start of the corresponding cap period.
Ofgem estimated that the overall effect of these changes would be to reduce volume risk by approximately 60%.
The regulator’s chief executive Jonathan Brearley said: “Our retail reforms will ensure that consumers are paying a fair price for their energy while ensuring resilience across the sector.
“Today’s proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers.
“It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers.
“The last year has shown that we need to make changes to the price cap so that suppliers are better able to manage risks in these unprecedented market conditions.”
Ofgem has also published a separate consultation which is seeking views on whether suppliers are incurring additional wholesale costs, beyond existing allowances in the cap in summer 2022 and winter 2022 as a result of wholesale price volatility.
This includes the costs of unexpected demand for standard variable tariffs (SVT). Soaring wholesale costs have resulted in more customers rolling onto SVTs than suppliers had budgeted for, meaning they have had to purchase additional energy at a cost above the cap wholesale allowance.
Suppliers also incur shaping and imbalance costs from refining their hedged positions to meet customer demand. While there is an allowance in the cap for these costs, wholesale price increases may have pushed costs above this.
An adjustment to address these two areas was introduced in February this year in relation to costs for cap period seven. Ofgem is now considering the costs relating to cap periods eight (April 2022 – September 2022) and nine (October 2022 – March 2023).
Both consultations are open till 14 June and Ofgem said it intends to make a decision ahead of the next cap update in August.