Ofgem has published its second working paper on the energy price cap, this time looking at using a “market basket” to set the initial level of the default tariff cap, which could then be updated over time.
The option would use market prices to set or update the cap by comparing a selection of competitive tariffs, possibly against some minimum criteria.
However, the regulator also notes there are “a number of reasons” why the most competitive tariffs in the market may not reflect the long-run costs of an efficient supplier – either initially or over time.
These include that:
* market prices will depend on suppliers’ pricing strategies and the degree of competition in the market, not just their underlying costs
* different suppliers may face different costs
* when updating over time, basing the cap on market prices could affect suppliers’ incentives on pricing
Making any further adjustments would move towards creating a benchmark – and away from the attractiveness of a market basket approach said Ofgem, which adds: “At this stage, we do not think that a market basket would be a suitable way of setting the initial benchmark.”
Industry is being asked for its thoughts on the second paper by no later than 13 April.
More details on Ofgem’s first working paper can be found here