The UK energy regulator’s decision to pass on rises in wholesale gas and electricity prices faster to consumers has been attacked by fuel poverty campaigners as industry experts warn they could drive up household bills to more than £4,200.
Ofgem, the energy regulator, confirmed on Thursday the energy price cap would be altered every three months instead of twice a year.
But analysts at Investec said the tweaks to how the price cap is calculated risk pushing up average household bills by as much as £500 in January when they could reach £4,210 a year. Prior to the changes Investec had calculated bills under the price cap would reach around £3,725 in January, up from £1,971 currently.
“Ofgem is effectively allowing the companies to charge a more realistic price that is more reflective of the cost of delivering power and gas,” said Martin Young at Investec.
“But the pressure on stretched households will only intensify.”
The energy regulator insisted the changes were required to prevent another large-scale crisis in the energy retail sector following the collapse of more than 30 suppliers since January 2021 amid surging wholesale prices. Consumers have been paying for the costs of rescuing customers of failed suppliers via their energy bills.
Ofgem said the Investec calculation was “a long way off” its internal “working estimate” of where the price cap might be in January. It added that it was “too early to speculate with any certainty” given the volatility in gas and electricity markets.
But the decision has deeply angered fuel poverty campaigners, who argue that the current system — whereby the cap is altered only twice a year on April 1 and October 1 — protected households from the worst of the wholesale price increases over the critical winter period when gas usage soars.
The regulator, strongly criticised for allowing too many poorly capitalised companies to enter the market in recent years, has been accused of siding with energy groups rather than consumers. Its own consumer research showed households were resistant to another price cap increase next January.
Ofgem on Thursday confirmed other changes to the price cap — which dictates bills for 24mn households — that it said would add about £60 to the average bill between October and December. They included an adjustment to ensure companies could recover the full costs of buying energy for the coming winter at very high prices.
Simon Francis, co-ordinator for the End Fuel Poverty Coalition, branded the move to quarterly cap changes “simply inhumane” and claimed it would force more people into fuel poverty in the middle of winter.
Caroline Abrahams, charity director at Age UK, called the decision a “hammer blow” that “poses an enormous threat to the health and wellbeing of vulnerable older households across Britain”.
Analysts have warned that the price cap, which dictates a maximum price suppliers can charge per unit of energy and limits their profit margins, could rise 70 per cent in October to almost £3,360 a year per household before rising again January.
Ofgem will confirm October’s price changes on August 26 but energy companies and consumer groups have already called on the government to provide more support for cash-strapped households.
Jonathan Brearley, Ofgem chief executive, acknowledged the situation was “deeply worrying for many people” but insisted the changes “ensure the price cap does its job, making sure customers are only paying the real cost of their energy, but also that it can adapt to the current volatile market”.
The regulator stressed the changes would also lead to decreases in wholesale prices being passed on to households faster.
Businesses are not covered by the price cap and negotiate bespoke fixed-term contracts with suppliers. But analysts have warned that many companies’ bills could increase fivefold from October, when many commercial energy contracts expire.
The Labour party accused the government of being “asleep at the wheel” on energy costs. “Millions of families face a cost of living catastrophe this winter,” said Alan Whitehead, shadow energy minister.
The Department for Business, Energy and Industrial Strategy said it recognised “the pressures people are facing with rising costs” and that it was already providing assistance, including a £400 discount on all households’ energy bills this winter.
Additional reporting by Jasmine Cameron-Chileshe in London