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Ofgem to face Committee hearing as MPs question price hike and rising energy bills



Ofgem took questions from a Government Committee this morning to assess the impact the price cap has on rising energy bills.

The session is part of the Business, Energy and Industrial Strategy Committee’s new inquiry into energy pricing and the future of the energy market as households face record costs.

Last week it was announced that the price cap would soar by £693 from April 2022 – increasing bills by 54 per cent for approximately 22 million customers.

This increase is driven by a record rise in global gas prices and Ofgem acknowledged the rise will be “extremely” worrying for many people.

Today, the Committee questioned the decision to hike the cap from April and the health of the market.

It also questioned Ofgem’s updated methodology which the regulator said was put in place to ensure the cap reflects the costs of supplying energy.

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Darren Jones, chairman of the committee, asked if in light of the hike and energy firms going bust, if this was all the result of a failure to regulate the market.

Jonathan Brearley, chief executive officer of Ofgem, responded by assuring “the price cap has worked.”

However, he acknowledged changes need to be made to protect the industry and its customers, saying regulation on the energy market needs to be tougher.

He added there needs to be a “change of culture” in how Ofgem works with providers and the wider industry, while more diversity is needed.

What is the price cap?

The energy price cap is the “backstop protection from the Government” according to Ofgem, which calculates and sets the rate.

The level limits the rates suppliers can charge for their default tariffs, which includes the standing charge and price for each kWh of electricity and gas.

However, due to soaring wholesale costs, the cap is now at its highest level since its introduction in January 2019.

Those on default tariffs will see their bills rise from £1,277 to £1,971 per year whilst prepayment customers will see a rise of £708, from £1,309 to £2,017.

The regulator advised struggling customers to contact their suppliers to access any help that may be available.

Mr Brearley said: “We know this rise will be extremely worrying for many people, especially those who are struggling to make ends meet, and Ofgem will ensure energy companies support their customers in any way they can.

“The energy market has faced a huge challenge due to the unprecedented increase in global gas prices, a once in a 30-year event, and Ofgem’s role as energy regulator is to ensure that, under the price cap, energy companies can only charge a fair price based on the true cost of supplying electricity and gas.

“Ofgem is working to stabilise the market and over the longer term to diversify our sources of energy which will help protect customers from similar price shocks in the future.”

What are energy companies doing about the cap hike and rising energy bills?

Energy companies across the UK have launched a number of schemes to help their most vulnerable customers.

British Gas introduced a £2mn fund to help their most financially vulnerable customers cover their bills this winter.

EDF also delivered £2.1mn of support to customers in 2021 in the face of rising prices with the firm saying it was committed to “helping customers monitor and reduce how much energy they need through provision of smart meters and online tools.”

Meanwhile, Octopus Energy said it would work with the Government to help customers through the energy crisis, but it has also introduced a number of measures in recent months.

A spokesperson said: “We’ve created the £2.5mn financial hardship fund (Octo Assist).

“The fund is open to all of our customers who need it, and can be accessed via an online tool which asks customers a series of questions about their financial situation.

“We can then offer a number of support options based on circumstances and need, including access to existing schemes, monetary credits from the fund, or personalised account support.”

Chancellor Rishi Sunak also laid out a number of measures last week to help customers cover their energy bills.

This includes a one off £200 reduction on bills, spread out across five years, £150mn awarded to local authorities to make discretionary payments to struggling households and an expansion of the Warm Home Discount scheme.

However, despite these measures, Mr Sunak said many families will still see their energy bills rise come April.

Why are global energy prices rising and how is it affecting the industry?

A combination of global factors led to the rise of wholesale gas prices.

Europe experienced a particularly cold winter in 2020/2021, placing pressure on supplies and reducing the amount of gas stored.

Wind energy supplies also dwindled as the 2021 summer was relatively windless.

There has also been high demand in Asia for Liquified Natural Gas (LNG), natural gas transported globally by ship which means less LNG than expected has reached Europe.

The International Energy Agency explained Covid-19 continued to impact the energy market throughout 2021.

It said: “The Covid-19 lockdowns pushed some maintenance work from 2020 into 2021, which weighed on supply at a time when demand was recovering.

“The impact was particularly tangible in the UK and Norwegian areas of the North Sea Continental Shelf.”

Energy companies themselves are struggling with rising wholesale prices with 26 domestic energy suppliers collapsing since August.

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