Ofgem has made a contingency decision to shorten the notice period for the introduction of a new price cap and delay the observation window accordingly.
Earlier this year, the energy regulator issued a consultation on proposals to shorten the period between announcing and implementing a new price cap from two months to one and move to a quarterly price cap period to reduce the time lag between observed market prices and their reflection in the cap.
In a letter to suppliers, Ofgem’s director of retail Neil Lawrence explained that the consultation revealed “significant support” for a reduction in the notice period, whilst acknowledging there are a “number of practical issues to work through”.
He continued: “Combined with our other proposals, which would also have the effect of pushing the observation window to later in the year, we have sufficient certainty to make a contingency decision to delay the price observation window.
“This is in line with our policy objective of shortening the period between price observation and delivery to reduce the volume risk faced by suppliers.”
Absent of any other decisions on the mechanism, the six-month observation window for the ninth price cap beginning in October will run from 1 March to 31 August – one month later than currently scheduled.
Lawrence added that other decisions currently under consideration would push the observation window even later in the year. He said Ofgem said will issue a statutory consultation on the detailed changes that will be needed to implement the shorter notice period and delayed observation window in due course.
Despite the delay to the observation window, the letter stated that prices observed from 1 February 2022 will still be used to calculate the cap for period nine as per previous guidance.
Lawrence said Ofgem had committed not to retrospectively change this guidance, so to move to a later observation period it needs to make a “forward-looking change” to the price observation profile.
He said: “We are aware that changes to the cap observation window could affect wholesale market liquidity, so rather than stopping price observations for a period, we will reduce the weighting of prices to transition more slowly towards the target observation window.
“Further changes to the cap methodology may push the target observation window even later, so it is prudent to make a change to guidance as soon as possible, to avoid the need for deeper reductions later in the period.”
Ofgem would therefore apply a 50% weighting to prices observed over a two-month period, from 16 March to 19 May inclusive. Absent of any other changes, the regulator would then resume a 100% weighting for prices observed between 20 May and 31 August inclusive .
If it does not go ahead with its contingency decision to shorten the implementation period, Ofgem will consult on increasing the weighting of price observations to 30 July to make up for the shortfall.
“We intend to publish our statutory consultation on further changes to the price cap methodology in early May, at which point we will provide further guidance on the treatment of prices observed for the remainder of the observation window,” Lawrence added.