Regulator Ofgem could update the energy price cap every three months
Energy regulator Ofgem has announced today that it will be reviewing whether to update the energy price cap more frequently in future as a result of the "unprecedented rise in wholesale market prices and volatility". This follows its decision yesterday to increase the price cap by 54% – adding a typical £700 a year to the bills of 22 million households from April.
Ofgem currently changes the price cap – which limits the amount providers can charge you for each unit of energy you use – every six months. It largely bases the cap on wholesale energy prices (those providers pay) over the six months leading up to when it announces the latest rates, with the changes taking effect two months later.
But because wholesale prices have rocketed so much recently, suppliers have been forced to sell their energy for less than they pay for it, as the price cap hasn't risen with these increases. It's led to more than 20 suppliers exiting the market since August 2021.
The regulator now says it could update the price cap as frequently as every three months, so the level of the cap is more closely linked to the wholesale cost of energy. It's launched a consultation today on whether it should update the cap more frequently. It hopes to confirm any changes by the spring, with the changes coming into effect from October.
We called for it to be updated more frequently than twice a year in November last year, when Ofgem initially sought views on how the price cap could work better for consumers. We said the current six-month adjustment was "not reflective of wholesale prices" and, by moving towards more frequent updates, "peaks and troughs in wholesale prices would balance out".
How does the price cap currently work?
The price cap sets a limit on the maximum amount suppliers can charge customers on standard tariffs for each unit of gas and electricity they use, and sets a maximum daily standing charge (what you pay to have your home connected to the grid).
As the cap limits the price providers can charge for each unit of gas and electricity, if you use more energy, you'll pay more, use less and you'll pay less.
Changes to the price cap currently come into effect in April (announced in February) and October (announced in August).
As part of its consultation, Ofgem's also proposing that it reduces the notice period of the new price cap level, from two months to one.
Ofgem adds Martin's suggestion to its latest consultation
While Ofgem is leaning towards changing it four times a year, it hasn't ruled out changing it three times a year as suggested by MoneySavingExpert.com founder Martin Lewis.
You can also watch Martin's new video explaining whether you should you fix your energy in light of the price cap rising or do nothing and stay on it.
Ofgem confirms new power to change the price cap at any time in 'exceptional circumstances'
The regulator has also today confirmed it's introducing new rules that allow it to change the price cap at any time, in response to "exceptional circumstances", such as a massive unexpected hike in wholesale prices. However, this is unlikely to be used often as the criteria for what are deemed "exceptional circumstances" are so stringent.
This'll be in place until October 2022, in which time it'll consider responses to its consultations and consider implementing changes that'll help the price cap work better for consumers.
What does Ofgem say?
An Ofgem spokesperson told us: "We are consulting on a proposed change which would enable us to conduct price cap reviews every three months rather than six, which would only come in after October if agreed."
On the new rules allowing Ofgem to change the cap at any time, the spokesperson added: "This is all in the interests of stabilising the market and making sure consumers and suppliers pay a fair price."