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Understanding the Price Cap: What It Means for Consumers and Suppliers

By Admin UserFebruary 26, 20224 min read
Understanding the Price Cap: What It Means for Consumers and Suppliers

Introduction

The energy price cap has become a headline issue in the GB utilities sector, especially as we move through the turbulence of 2021–22. But what exactly is the price cap, how does it work for both gas and electricity, and what are its implications for consumers and suppliers? In this article, I’ll break down the mechanics of the cap, explore its impact on both markets, and reference the key public documents and data that underpin this critical policy.

The Origins of the Price Cap

The energy price cap was introduced by the UK government in January 2019, following concerns about “loyalty penalties” and a lack of competition in the retail market. The cap is set by Ofgem and applies to standard variable and default tariffs for both gas and electricity.

For the official background, see Ofgem: About the Energy Price Cap.

How the Price Cap Works

Electricity

For electricity, the cap sets a maximum unit rate and standing charge that suppliers can charge customers on default tariffs. Ofgem reviews and updates the cap every six months, using a methodology that reflects wholesale costs, network charges, policy costs, and a modest profit margin.

The detailed methodology is available in Ofgem’s Price Cap Decision Document.

Gas

The gas price cap operates in parallel, with its own unit rates and standing charges, but follows the same principles and review cycle as electricity. The cap reflects the cost of wholesale gas, network charges, and other relevant costs.

For more, see Ofgem: How the Price Cap is Calculated.

Impact on Consumers

The price cap is designed to protect consumers from excessive charges, particularly those who do not regularly switch suppliers. According to Ofgem’s State of the Energy Market 2021, around 15 million households are covered by the cap.

However, the cap does not guarantee the lowest price—just a fair one based on market conditions. In periods of high wholesale prices, the cap can still rise significantly, as seen in the record increases announced for April 2022.

Impact on Suppliers

Electricity

For electricity suppliers, the cap creates a challenging environment, especially when wholesale prices rise rapidly. Suppliers who have not hedged their purchases in advance may find themselves selling electricity at a loss, leading to financial distress or even insolvency. This was a key factor in the wave of supplier failures in late 2021 and early 2022 (Ofgem: Supplier of Last Resort process).

Gas

Gas suppliers face similar pressures, with the added complexity of global gas market volatility. The surge in wholesale gas prices in 2021–22 left many suppliers unable to recover their costs under the cap, accelerating market exits and consolidation.

For a technical breakdown of supplier costs and risks, see Ofgem’s Default Tariff Cap: Technical Annex.

Case Study: The 2021–22 Supplier Failures

Between August 2021 and February 2022, over 25 energy suppliers exited the market, affecting millions of customers. Both gas and electricity suppliers were hit, with Bulb Energy’s collapse being the most high-profile case. The Supplier of Last Resort (SoLR) process, managed by Ofgem, ensured continuity of supply, but at significant cost to the industry and, ultimately, consumers.

For a real-time list and analysis, see Ofgem: List of Supplier Exits.

Settlement and Market Codes

Electricity

Settlement for electricity is managed by Elexon under the Balancing and Settlement Code (BSC). When a supplier fails, Elexon coordinates the transfer of customers and ensures that settlement obligations are met, minimising disruption to the wider market. For more, see Elexon: Supplier Failure Guidance.

Gas

In the gas market, Xoserve plays a similar role, managing data flows and settlement under the Uniform Network Code (UNC). The process for handling supplier failure is outlined in Xoserve’s Supplier of Last Resort Guidance and the UNC.

Criticisms and Future Reform

The price cap has been both praised and criticised. Supporters argue it protects vulnerable consumers; critics say it distorts the market and discourages innovation. Ofgem is currently consulting on potential reforms, including more dynamic pricing and improved support for vulnerable customers (Ofgem: Retail Market Reform).

Conclusion

The energy price cap is a central feature of the GB utilities landscape, shaping the experience of both gas and electricity consumers and suppliers. As the market continues to evolve, the cap’s future—and its role in a decarbonising, increasingly volatile market—remains a key question for policymakers and industry participants alike.

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