Ofgem’s price cap overhaul will push energy bills to £4,200 in January, experts warn

·3 min read
energy bills ofgem smart metre
energy bills ofgem smart metre

An overhaul of the energy price cap is set to lead to an even sharper than feared jump in heating bills to £4,266 this winter, experts have warned.

Cornwall Insight on Tuesday became the latest forecaster to predict annual energy bills will surge above £4,000 in the first three months of 2023, as the cost of natural gas continues to rise. Its new prediction that bills will hit £4,266 in January is £650 higher than the consultancy previously forecast.

Dr Craig Lowrey, principal consultant at Cornwall, said the rise would be sharper than expected because of changes to the way regulator Ofgem calculates the price cap.

Suppliers are being allowed to charge more up front this winter so that they can quickly recoup the costs of buying energy in advance – a practice known as hedging.

The policy change is aimed at preventing a repeat of last year, when dozens of suppliers went bust as the cost of energy rocketed far above what they were allowed to charge households.

Dr Lowrey said: “Many may consider the changes made by Ofgem to the hedging formula, which have contributed to the predicted increase in bills, to be unwise at a time when so many people are already struggling.

“However, with many energy suppliers under financial pressure, and some currently making a loss, maintaining the current timeframe for suppliers to recover their hedging costs could risk a repeat of the sizable exodus seen in 2021.

“Given that the costs of supplier failure are ultimately met by consumers through their energy bills, a change which means that this is less likely is welcome, even if the timing of it may well not be.”

Last week City investment bank Investec warned annual bills could rise to £4,400 in January due to the Ofgem changes.

With an increase of more than £1,000 in the price cap already looming in October, Dr Lowrey warned the policy may no longer be “fit for purpose” and called on the Government to urgently announce further support for households.

“Rather than critiquing the methodology of the cap, it may be time to consider the cap’s place altogether,” he said.

“After all, if it is not controlling consumer prices, and is damaging suppliers’ business models, we must wonder if it is fit for purpose – especially in these times of unprecedented energy market conditions.”

The Government has already promised £400 to every household to help with these costs, and extra help for the more vulnerable.

Dr Lowrey said it may be time to consider replacing the price cap altogether with different mechanisms to help low-income households, including potentially a “social tariff”.

“Right now, the current price cap is not working for consumers, suppliers, or the economy,” he added.

Ofgem’s changes should lead to lower bills in the second half of next year, Dr Lowrey said. Cornwall expects bills to peak at £4,427 in April, before finally dropping slightly to £3,810 from July and £3,781 from October next year.

A spokesman for Ofgem said: "The wholesale market continues to move extremely quickly so no forecast for next year is at all robust at this stage and will therefore have very limited value, especially for consumers who must always be the main priority.

"We cannot stop others from making predictions but we would ask that extreme caution is applied to any predictions for the price cap in January or beyond."