British consumers face updated price cap level, in effect from October

Responsible for setting the price cap is the energy regulatory authority in Great Britain, Ofgem, whilst the mechanism was firstly introduced in 2019 by the government, in an effort to limit the profits of electricity suppliers and to protect consumers by capping the price charged for the variable default energy tariff. The methodology used to calculate the level of price cap, which was being updated twice a year until now, is based on the electricity wholesale prices, network costs, and suppliers’ margin limited to 1.9% considering current operational costs for supplied energy among other elements.

This approach seemed to have positive feedback on both suppliers and consumers, until recent energy crisis developments ramped up wholesale energy prices globally resulting in great volatility and insecurity in retail markets subsequently. Last year, the bi-annually reviewed price cap resulted in multiple suppliers’ failure, specifically smaller ones with short-term hedging strategies, due to their inability to offer prices that didn’t reflect rapidly surging wholesale energy prices. On this note, Ofgem announced a quarterly review of the price cap level during the summer and a more transparent methodology along with extended restrictions for suppliers to protect consumers.

The updated price cap is set to £3.549, 80% higher when compared to the previous cap price in April, for a dual fuel variable default contract of a typical household, coming in effect from October 1st until December 31st. This update in the price affects more than 24 million British households under the default or variable rate on credit meters and reflects mostly the derailing upward trend of wholesale electricity prices. The upcoming quarterly review in late November will correspond to the next three-month period, January 2023 – March 2023, and the price is forecasted to further rise. It is expected that the new Prime Minister to take over from beginning of September, will announce new package of support measures to mitigate the impact of the unprecedented price increase.

Under the current circumstances and while the high unpredictability of energy prices continues, the price cap support mechanism has become a very controversial matter of discussion amongst stakeholders. Some people argue that a different approach focusing mostly on vulnerable consumers would be more effective, by introducing a new social tariff for low-income households and ultimately develop support mechanisms for both consumers and suppliers.

Author:

Despoina Papadopoulou, Energy Market Analyst

Sources:

[1] Financial Times: ‘’Has Britain’s energy price cap run its course?’’, 22.08.2022

[2] Ofgem: ‘’Ofgem updated price cap level and tightens up rules on suppliers’’, 26.08.2022

[3] Oilprice: ‘’The UK price cap has plunged millions into energy poverty’’, 28.08.2022