Ofgem has confirmed the energy price cap will be updated quarterly rather than every six months as it warned customers faced “a very challenging winter ahead”.
The energy regulator said reviewing the price cap for household bills every three months would allow it to “adjust much more quickly” to market volatility.
Energy prices surged last year as the global economy recovered from the Covid-19 lockdown. The invasion of Ukraine in late February caused a further spike in prices as Western allies sought to economically isolate Russia, a major supplier of gas and oil.
The effects of rising energy prices are being felt around the world, and in the UK it has revealed a price cap system that is “not fit for purpose for the market we have today”, said Jonathan Brearley, chief executive of Ofgem .
The regulator has raised the cap on the average dual fuel tariff by 54% to £1,971 since April, the biggest increase since the cap was introduced in 2019.
Consumers have been warned they face another big rise to just under £3,500 when the next cap – which comes into effect in October – is announced later this month.
Analysts at Cornwall Insight have predicted that the price cap is set to rise to £3,615 a year from January, piling further pressure on households as the cost of living crisis intensifies.
Increasing the cap every three months instead of every six months will mean prices will rise more quickly for consumers to reflect higher wholesale prices – and fall more quickly when they do.
Ofgem has faced some criticism over the timing of the move, which will mean consumers will pay more this autumn if, as expected, wholesale energy prices remain high.
Brearley defended the move and said it would prevent more providers from going bankrupt, the costs of which are indirectly passed on to consumers. The National Audit Office said the bankruptcies of 28 energy firms during the crisis will cost consumers £2.7bn.
“Because of Russia’s actions, because of increased demand across Asia, we’re seeing an unprecedented rise in prices in the wholesale market,” he told BBC Radio 4’s Today programme. “And we’re also seeing huge volatility and huge change in a short period of time.
“The price cap could go up if costs go up, and I would caution against too many predictions of a change.” These long-range predictions are difficult to make. But also, when prices fall, the price ceiling will fall just as quickly.”
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Brearley added: “I know the changes we’re seeing don’t seem fair to anyone, but at the end of the day they’re driven by the changes we’re seeing globally in the price of gas, and that’s not a British problem. This is a global problem.”
He also said Ofgem was looking at fixed charges, the fixed charge for connecting to the grid regardless of how much energy is used. Prepaid meter users, many of whom have been described as more vulnerable by anti-poverty campaigners, pay particularly high fixed charges and the regulator has faced calls for months to act to reduce fixed costs.
Ofgem is “coming out with proposals in the coming weeks”, Brearley said.
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