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Energy price cap set to change every three months and cheaper switchers' deals effectively kiboshed under new plans unveiled by Ofgem

Energy price cap set to change every three months and cheaper switchers' deals effectively kiboshed under new plans unveiled by Ofgem

The energy price cap, which governs what most pay for their energy, is set to change every three months from October under plans announced by Ofgem today. The regulator also revealed it will make the 'market stabilisation charge' harsher. This is a charge levied on firms acquiring new customers with cheaper fixed deals, which will likely make it harder for suppliers to undercut the price cap.

The plan to increase how often the price cap is reviewed means it will now additionally change every January and July, not just in April and October. According to the regulator, this means the price cap can reflect the "most up-to-date and accurate energy prices". Ofgem says it will help provide stability in the market and reduce supplier failures, with more than 20 failures last winter pushing up costs across the energy market.

However, with wholesale energy prices still high and with current predictions for the cap to rise by an average 30% in October to about £2,600 a year on typical use, it could mean more frequent price increases, particularly this winter, as we'll now see the price cap change again on 1 January 2023.

The regulator has also decided to make the 'market stabilisation charge' tougher. This charge was introduced in April and means when wholesale prices drop significantly and suppliers want to offer cheap switcher deals, they have to pay the losing supplier a fee.

While the change to the price cap is a proposal, Ofgem says it is "minded to" this approach, so it is unlikely to change significantly.

Right now, there are no deals cheaper than price-capped standard tariffs, which 23 million households are on, though there are some fixed deals that could be worth considering – see Martin's latest 'should you fix your energy deal?' analysis for full info.

Martin: 'In these desperate times, it has ignored all asks for consumers'

MSE founder Martin Lewis's immediate reaction to these changes, as has been covered in many newspapers, are not fit for publication pre-watershed. He admits to losing his temper and swearing in an Ofgem meeting about them "selling consumers down the river". He has apologised for his outburst, but the substantive content still stands.

A couple of his many tweets on this issue are below, and to hear him explain his views, listen to his two-part interview with LBC:

How will the price cap change – and what does it mean for my bills?

The price cap sets a limit on the maximum amount suppliers can charge customers on standard tariffs for each unit of gas and electricity you use, and sets a maximum daily standing charge.

Under the current price cap rules, Ofgem changes the level twice a year. There's a 'summer' price cap, which runs from April until September, and a 'winter' price cap, which runs from October until March. Under the current proposals, changes to the cap level will be made more frequently.

Energy price cap timings 

Price cap period  Typical annual cost (1) Date announced Wholesale assessment period
Current price cap:
1 April 2022 to 31 October 2022
£1,971 4 February 2022 1 August 2021 to 31 January 2022
October 2022 cap:
1 October 2022 to 31 December 2022
Predicted at: 
£2,610
26 August 2022 1 February 2022 to 18 August 2022
(Ofgem will apply certain weightings due to the longer wholesale price observation period and shorter price cap period)

January 2023 cap:

1 January 2023 to 31 March 2023

Predicted at: 
£2,610
24 November 2022 1 February 2022 to 16 November 2022 
(Ofgem will apply certain weightings due to the longer wholesale price observation period and shorter price cap period)
April 2023 cap: 
1 April 2023 to 31 June 2023
No predictions yet  27 February 2023  17 November 2022 to 17 February 2023
July 2023 cap:
1 July 2023 to 31 September 2023
No predictions yet 26 May 2023 20 February 2023 to 18 May 2023
October 2023 cap: 
1 October 2023 to 31 December 2023
No predictions yet 25 August 2023 19 May 2023 to 17 August 2023
This covers the price cap cycle until the end of 2023. It will likely carry on using a similar pattern as above onwards from 2024. (1) Based on typical annual use for a dual-fuel household paying by direct debit.

While Ofgem says more frequent price changes means lower wholesale prices can be passed on more quickly, it also means the reverse is true. If wholesale prices remain high, as they are now, we could see even more frequent price hikes.

This is worrying for this winter, with energy analysts already predicting a massive 31% increase to the cap on 1 October 2022.

What's more, the new cap from January will partly be based on the high wholesale energy prices we've seen so far this year. That's because we're already halfway through the 'price observation window' – the period Ofgem looks at to determine wholesale costs under the price cap. While this would usually set the price for the price cap from October through to March, the regulator will be factoring this into January's cap, as firms have already bought some energy for that period.

What is the 'market stabilisation charge' – and what does it mean for bills?

The 'market stabilisation charge' is a charge on suppliers when they sign up new customers. When you switch, the new supplier will have to pay this fee to the old provider if wholesale energy prices fall significantly.

It was introduced in April to enable suppliers that have bought lots of energy in advance – to cover the higher number of customers on standard variable tariffs right now – to recover some of the costs if wholesale prices drop suddenly and they see huge numbers of customers switching away from their standard tariff, according to Ofgem.

When it was introduced, suppliers would have to pay if wholesale prices dropped by 30% on the level Ofgem uses to calculate the price cap. The changes announced today mean that suppliers will now have to pay a charge if wholesale prices drop by just 10%.

Initially, the gaining supplier will have to pay the losing supplier 75% of the cost of the energy beyond this trigger point – this has now been increased to 85% following today's announcement.

This is worked out as a pound per kilowatt hour (£/kWh) charge which Ofgem will publish weekly. The charge is multiplied by the customer's annual usage and the gaining supplier pays that amount.

This could potentially kill the return of cheap deals for switchers if wholesale prices were to fall dramatically, as suppliers would have to bake these additional costs into the price of their tariffs.

What does Ofgem say?

Ofgem chief executive Jonathan Brearley said: "Our top priority is to protect consumers by ensuring a fair and resilient energy market that works for everyone. Our retail reforms will ensure that consumers are paying a fair price for their energy while ensuring resilience across the sector.

"Today's proposed change would mean the price cap is more reflective of current market prices, and any price falls would be delivered more quickly to consumers. It would also help energy suppliers better predict how much energy they need to purchase for their customers, reducing the risk of further supplier failures, which ultimately pushes up costs for consumers.

"The last year has shown that we need to make changes to the price cap so that suppliers are better able to manage risks in these unprecedented market conditions."

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