Source · Select Committees · Public Accounts Committee
Recommendation 16
16
Acknowledged
Ofgem sets the price cap every six months by calculating how much it costs an...
Conclusion
Ofgem sets the price cap every six months by calculating how much it costs an efficient supplier to provide gas and/or electricity to a customer.34 Ofgem told us that, when setting the cap, it had to reflect the cost at which suppliers buy the energy in the wholesale market. It explained that in winter 2021–22 prices were six times their normal level, and by the summer of 2022 were ten times the normal level.35 In May 2022 Ofgem estimated that the price cap for a typical customer paying by direct debit would rise to around £2,800 a year in October 2022, from £1,971 in April 2022. Ofgem told us that, as a result of energy prices continuing to increase, it expected prices to rise even further.36 In August 2022 Ofgem announced that the energy price cap would increase to £3,549 per year from 1 October 2022. Ofgem warned that while the market remained too volatile to allow it to make projections, the market for gas in winter means that prices could get “significantly worse through 2023”.37
Government Response Summary
The government acknowledges the committee's recommendation regarding the price cap and states that they will develop a new approach to consumer protection in energy markets from April 2024 onwards, including considering options such as social tariffs.
Government Response
Acknowledged
HM Government
Acknowledged
4.1 The government agrees with the Committee’s recommendation. Target implementation date: April 2024 4.2 The price cap has protected consumers from being overcharged for their energy for many years. The cap reflects the real cost of supplying energy to households, including the costs of purchasing wholesale gas and electricity, and the legislation requires Ofgem to set the cap at a fair level. 4.3 However, the price cap was introduced when the energy market was much less volatile and was not designed to deal with the extreme wholesale prices seen in recent months. So, to protect households from high wholesale prices the government has introduced the Energy Price Guarantee (EPG), which supersedes the cap as the main consumer price protection until 31 March 2024. The price cap remains in place and now operates as the reference price for delivering the EPG. Ofgem continues to monitor the cap level and make necessary changes to ensure the cap continues to protect existing and future default tariff customers. 4.4 As set out in the Autumn Statement 2022, the government will develop a new approach to consumer protection in energy markets, which will apply from April 2024 onwards. The government is committed to work with consumer groups and industry to consider the best approach, including options such as social tariffs, as part of wider retail market reforms. The objectives of this new approach will be to deliver a fair deal for consumers, ensure the energy market is resilient and investable over the long-term, and support an efficient and flexible energy system. Ofgem supports this approach and will work closely with the government on future measures.