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Energy market U.K Ofgem Proposes Reforms to Energy Price Cap Mechanism

Updated: Apr 2

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U.K Energy market update

Ofgem has recently released a discussion paper presenting potential changes to the existing energy price cap mechanism. The paper suggests several reforms aimed at enhancing market efficiency and promoting greater consumer engagement.

One of the key proposals is the introduction of a more dynamic pricing structure, featuring time-of-use dependent unit rates. This approach aims to encourage consumers to adjust their energy consumption habits, especially during peak demand periods.

Additionally, Ofgem is considering the implementation of a targeted cap mechanism that takes into account factors like vulnerability to protect those most at risk from high energy prices. The paper also explores the possibility of adopting flexible, market-based price protections, such as setting limits on supplier margins or banning acquisition-only tariffs.

These proposed reforms come at a time when there are ongoing concerns about the effectiveness of the current energy price cap in ensuring fair and affordable energy prices for consumers.

Industry Responses

In response to Ofgem's announcement of launching a consultation on the future of the price cap, industry experts have shared their insights:

Simon Virley, Vice Chair and Head of Energy and Natural Resources at KPMG UK, commented: “While the price cap introduced five years ago has been effective in saving customers money, it has also had unintended consequences. Our research indicates that the cap has stifled competition and innovation in the market, leading to a decline in switching levels. As we envision the future of the retail energy market, it's crucial to strike a balance between consumer protection and incentives for investment and innovation."

Richard Neudegg, Director of Regulation at Uswitch, added: “Nearly three years into the energy crisis, competition in the market has yet to fully recover, with the price cap being a contributing factor. We agree with Ofgem's stance that reforms are needed to address the limitations of the price cap. The key will be in the details, but it's essential that any changes to the cap create conditions for better deals for consumers and offer targeted protections for the most vulnerable."

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