Ofgem launches consultation on future of energy price cap amid UK net zero push

Ofgem has launched a review into the future of the energy price cap in a bid to ensure it continues to protect consumers in the net zero age.

The energy regulator said the move towards renewable energy sources, use of electric vehicles, and the proliferation of tariffs offering cheaper rates at different times of the day, means a universal safety net may no longer be effective. It said it could mean the price cap morphs into a more targeted measure, or that it could move to cap energy suppliers’ profit margins.

Since the energy crisis began in 2021, the Ofgem cap has governed how much most UK households pay for their gas and electricity. It will tumble 12% on Monday 1 April - and could fall even further later in 2024.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Fixed energy tariffs have made a return to the market. But only a few are competitive with the next energy price cap rate.

Ofgem looking to ‘future-proof’ consumer price protection

Ofgem has said it is opening a discussion about the energy price cap’s future in an attempt to ensure people are protected from sharp practice in the future. It wants energy bill payers, businesses, suppliers and consumer groups to give their views on what it should do.

When the energy regulator first implemented the price cap in January 2019, it was intended to shield consumers who were on standard variable tariffs from extortionate unit rate charges - a so-called ‘loyalty penalty’ as many people used to be moved on to this sort of tariff when their fixed energy deal ended.

At the time, the UK was mostly reliant on fossil fuels - particularly natural gas. However, with people cutting back on their energy use as a result of the cost of living crisis, and renewable - or ‘greener’ - energy becoming more widely available, Ofgem has envisaged a future where it “could become harder to retain a universal price cap” that adequately covers the majority of people’s bills.

It has cited EVs, heat pumps and solar panels as just some of the ways in which domestic energy use is changing. It has also pointed to growth in the number of homes opting for time of use tariffs - energy deals that offer different electricity rates throughout the day as and when wholesale prices change. These tariffs are likely to become more common from 2025 onwards, when the wholesale market begins to move to a new half-hourly trading model. 

So, Ofgem has made several suggestions about how the price cap could evolve. Its ideas, which have been released in a ‘discussion paper’, include:

As yet, the regulator has not set a date for when the price cap could change. Its announcement comes after the government launched a consultation on how standard variable tariffs should change.

Ofgem: ‘Net zero means we have to change’

Commenting on the announcement, Ofgem’s director general of retail and markets, Tim Jarvis, said: “The energy market is changing as we move to net zero, and we recognise the systems we have in place may need to change too.

“We’re looking in detail at the elements of the price cap that have worked well and the challenges we’ve identified in recent years, while also considering how a wide range of future consumers will use and pay for energy to make sure we develop the right measures that will protect and benefit consumers across the board.”

News of the consultation has been welcomed by industry figures. 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.”