Ofgem unveils proposals for energy price cap overhaul

By Staff
3 Min Read

Ofgem has today unveiled a discussion paper outlining potential reforms to the price cap mechanism.

Among the options outlined in the paper are plans to introduce a more dynamic pricing structure.

This would entail time-of-use dependent unit rates, aiming to incentivise consumers to adjust their energy consumption patterns, particularly during peak periods.

The proposals put forward a series of options aimed at reshaping the current system, intending to foster greater consumer engagement and market efficiency.

Ofgem suggests the possibility of implementing a targeted cap mechanism, which could take into account various factors including vulnerability, to ensure that those most in need are adequately protected from excessive prices.

Furthermore, the discussion paper explores the prospect of adopting more flexible, market-based price protections.

This could involve setting a limit on the margin suppliers can make between their default tariffs and those available in the wider market.

Alternatively, Ofgem proposes the idea of replacing the cap altogether with a ban on acquisition-only tariffs, thus encouraging suppliers to compete more directly on price.

These proposals come amidst ongoing concerns about the effectiveness of the current energy price cap in delivering fair and affordable energy prices for consumers.

Responding to the announcement from Ofgem this morning that it is launching a consultation on the future of the price cap, Simon Virley, Vice Chair and Head of Energy and Natural Resources at KPMG UK, said: “The price cap was introduced five years ago as a temporary measure to protect ‘sticky’ customers, while the energy market was reformed.

“In the intervening years, the price cap has worked in saving customers money, especially in recent years where we have seen unprecedented price rises.

“However, our recent research has shown that this has come at a price, with effective competition and innovation in the market suffering and switching levels falling off a cliff.

“As we look to what a future retail energy market looks like – it will be key to balance proportionate consumer protection with incentives for investment and innovation in a smarter energy system that benefits all consumers.”

Richard Neudegg, Director of Regulation at Uswitch, said: “Almost three years on from the start of the energy crisis, we’re yet to see a full return to competition in the market – and the price cap must bear some of the blame.

“We support Ofgem’s view that the price cap needs reform, given it has proved to have significant limitations.

“The devil will be in the detail, but it is vital that any changes made to the cap creates conditions to bring back better deals for consumers and also offers targeted protections to the most vulnerable.”

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