Energy price cap could change every 3 months

Ofgem has announced plans to review and possibly change the energy price cap every three months from October 2022. Simultaneously, the regulator has announced harsher market stabilisation charges, which are levied at energy firms when they take another supplier’s customer. Read on to uncover the finer details of these announcements and what they could mean for your energy bills.

Changes to the energy price cap

The energy price cap was first introduced by Ofgem on the 1st of January 2019 with the main aim of preventing families from getting ripped off on a variable tariff. It set a limit on what energy companies could charge for their electricity and gas. These limits are applied to units of energy rather than the overall bill each month or year.

Ofgem has now announced that it will allow price cap changes as frequently as every three months from October 2022. The energy price cap is not certain to change every three months, but it will continually be subject to a three-month review. The reason for more reviews and potentially more changes each year is so energy prices can accurately reflect up-to-date wholesale prices. In doing so, Ofgem state it will stop supplier failures and contribute to market stability.

By reflecting wholesale energy prices there is a chance that energy prices could come down. But there is also the possibility that our energy bills will get more expensive. There are already predictions that the cap will increase by 30% in October, and due to the announcement, it could increase again in the middle of winter.  

Tougher market stabilisation charges

The market stabilisation charge is a fee that energy companies may have to pay to other energy firms. They pay this charge when a customer switches to them because they’re offering a cheaper deal. This usually happens when wholesale energy prices drop and one supplier wants to make their prices cheaper, attracting lots of customers using other suppliers.

Previously, the fee was only applied when wholesale energy prices dropped by 30%. When this happened, the gaining supplier was made to pay the supplier losing a customer 75% of the energy costs from this point. But the new announcement sees firms having to pay the old supplier when the wholesale energy price drops by just 10%. Moreover, the benefiting supplier will now have to pay the supplier losing a customer 85% of the energy costs.

The harsher fee is hoped to prevent companies from significantly lowering prices and also contribute to market stabilisation. But it will also make it much more difficult for energy firms to offer lower tariffs. There is now less incentive for them to offer a cheaper deal when they have to pay more in fees at a lower threshold.

The change has angered Martin Lewis who found out about them in a meeting with Ofgem He has since continued to state his frustration in the media.

June 2022