Ofgem, the UK regulator for energy, has begun discussions about introducing a ‘dynamic’ price cap.
The proposal, which would see energy prices adjusted throughout the day based on demand, is just one of several alternatives to the current price cap system under discussion.
What’s wrong with the current price cap?
Under the current price cap system, Ofgem sets a maximum limit on the per-unit cost of gas and electricity for customers on a variable tariff. This cap is adjusted every 3 months based on changes to the wholesale price of energy. The price cap is next due to change on April 1st.
The current system was designed to stop customers from being moved onto ever higher tariffs at the end of a fixed-term contract. The price cap was to serve as a maximum price limit, with suppliers competing to offer better value tariffs. However, during the UK energy crisis, these capped tariffs became the cheapest available.
As of 2023, 13% of households in the UK are in fuel poverty. Energy has become unaffordable for millions, and the pressure is on Ofgem to find a fair solution.
What is a dynamic price cap?
Discussions of alternatives to the current system are still in the early stages, but one proposal is a dynamic price cap that changes based on demand. Little has been announced beyond the idea of adjusting energy prices based on consumer demand.
Dynamic pricing for energy has already been tested in a more limited capacity in the UK. One example is economy 7 household meters, which record daytime and night-time energy usage separately. Energy used at night is cheaper, allowing households which can time their usage with reduced demand to save money.
More recently, the National Grid has begun operating its ESO scheme. Households with smart energy meters can register and receive money back on their bills for cutting energy use during peak times.
What other price cap changes are being discussed?
Beyond the potential dynamic price cap, other changes have been proposed as part of Ofgem’s rework. Among these is a targeted price cap. This would be based on factors such as vulnerability, rather than being applied universally.
Also proposed is a cap on the difference between default tariffs and market tariffs, or a cap on the profit margin for energy companies. Ofgem has also trialled a ban on acquisition-only tariffs – energy tariffs only available to new customers – recently, with discussion ongoing about whether this should continue.
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