Ofgem is proposing to introduce a temporary increase to the price cap over fears bad debt could force more energy retailers to go bust.
The regulator has revealed that energy debt has risen to £2.6 billion – its highest ever level – due to a combination of the rise in wholesale energy prices, and wider cost of living pressures.
It explained that a request for information from energy suppliers revealed the gap between costs and the existing cap allowance in cap period 8-10a (April 2022 – June 2023).
Ofgem said the divergence between debt-related costs and the price cap allowances was predominantly caused by increased bad debt costs in cap period 10a (April – June 2023).
“These increased bad debt costs in cap period 10a could partly reflect that government support packages were no longer mitigating the impact of underlying bad debt pressures,” it added.
It said its proposed temporary increase could see bills increase by £17 on average per year across all customers, starting from next April and lasting for a year.
This option would also see the regulator conduct a trueup review, assessing the appropriateness of the initial allowance in light of further data, covering the period April 2022 to March 2024. This would then consider whether it needs adjusting in a future price cap.
Ofgem admitted that its proposals would have “varying impacts” on customers with different payment types, with the regulator estimating that the allowance for debt-related costs represents approximately 6% of typical dual fuel standard credit bills, 1% of typical dual fuel direct debit bills and 1% of typical dual fuel PPM bills for cap period 11a (October – December 2023).
While acknowledging that consumer bills will increase if the plans go ahead, the regulator explained that customers risk facing even higher costs and poorer standards of service if suppliers go bust.
Tim Jarvis, director general for markets at Ofgem, said: “We know that households across the country are struggling with wider cost of living challenges, including energy, so any decision to add costs to the price cap is not one we take lightly.
“However, the scale of unrecoverable debt and the potential risk of suppliers leaving the market or going bust, which passes on even greater costs to households, means we must look at all the regulatory options available to us.
“Ofgem cannot subsidise energy or force businesses to sell it at a loss and suppliers must be in a position to offer high quality services to customers.
“We must consider the fairest way to maintain a stable energy market and we will do this in consultation with all our partners to ensure we are protecting the most vulnerable households.”
Elsewhere Energy UK has published its Winter 2023 Voluntary Debt Commitment, an agreement by suppliers to pledge additional financial support and steps to provide support for customers in debt.