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UK energy watchdog to examine price caps and tougher rules

Economy5 minutes ago (Oct 29, 2021 14:31)

© Reuters. FILE PHOTO: The sun rises behind electricity pylons near Chester, northern England October 24, 2011. REUTERS/Phil Noble

By Susanna Twidale

(Reuters) -British energy watchdog Ofgem will examine whether its price cap reflects the costs and risks facing suppliers and could apply tougher rules for energy companies, it said on Friday as it outlined actions to deal with rising power prices.

Many British energy companies, often supplying both gas and electricity to homes and businesses, have struggled in the face of soaring wholesale energy costs because the price caps limit how much of the increases can be passed on to customers.

Thirteen suppliers, with about 2 million customers combined, have gone bust since the beginning of September, and Sky News reported on Friday that large supplier Bulb, with 1.7 million customers, is also under threat.

“The unprecedented rise in energy prices this year has changed the perception of risk and uncertainty in this market,” Ofgem said in a letter to suppliers, published on its website.

The consultation will be launched in November, with a decision on any changes to be published in February, when the next price cap level will be announced and in time for changes to be implemented before the new cap would take effect in April.

Ofgem calculates the cap using a formula that includes wholesale gas prices, energy suppliers’ network costs and costs of government policies such as renewable power subsidies.

The cap is updated twice a year and rose by 12-13% from the start of October, but wholesale prices have risen far higher since that cap was set in August.

Analysts have said the difference between wholesale energy prices and prices that suppliers can charge is about 400 pounds ($545) per customer per year.

Ofgem said it would also review its licensing rules for suppliers and more closely scrutinise company finances once they reach milestones of 50,000 and 200,000 customers.

The watchdog will update “existing guidance documents to reflect the increased levels of financial resilience we will be expecting”, it said.

Large energy suppliers Centrica (LON:CNA) and Iberdrola (MC:IBE)’s Scottish Power welcomed the move.

Scottish Power also warned that many more suppliers could go bust in the next few weeks.

“We need urgently to address the structural failures in the retail market – reforming the price cap so that it can respond more quickly to price shocks in the wholesale energy markets,” Scottish Power CEO Keith Anderson said in an emailed statement.

UK energy watchdog to examine price caps and tougher rules

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