U.K. May Change Energy Price Cap More Often to Ease Burden

(Bloomberg) --

U.K. energy regulator Ofgem is considering altering the price cap for consumer bills more frequently to deal with volatility in wholesale markets that shows little sign of abating.

The watchdog on Thursday announced a 54% increase from April to the cap on the amount suppliers can charge most households. The level is currently changed every six months, and making it more frequent would soften such huge hikes on bills. The proposed changes are being consulted on until March 4.

“We need to look to the future and the difficult news for all of us is that this volatile market might be with us for some time,” Ofgem Chief Executive Officer Jonathan Brearley said on BBC Radio. “It might be better that we adjust the price cap more frequently to allow customers to adjust much more quickly to some of the changes we’re seeing in the market.”

The cap has shielded households from surging wholesale costs this winter. But the rally in prices will finally feed through into bills when they jump by almost 700 pounds ($951) from April, adding to the biggest squeeze on incomes in three decades. Chancellor Rishi Sunak announced a 9 billion-pound package on Thursday to help alleviate some of the burden from higher energy bills.

The cap level is determined by wholesale prices over the previous six months, creating a time lag between when the energy is bought by suppliers and sold to consumers. That can cause “large, hard-to-avoid losses for suppliers, which can ultimately lead to higher prices for consumers,” Ofgem said.

“Making the cap more nimble should help suppliers as pricing should be more reflective of the prevailing wholesale environment, with consumers also less likely to face significant movements in pricing,” said Martin Young, analyst at Investec Bank Plc.

Gas prices have almost quadrupled in the past year, reaching a record in December. Ofgem acknowledged that it hasn’t been adequately reflecting these costs in the previous price cap and has allowed suppliers to claim 59 pounds back on bills from April.

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