How could the energy price cap change?

More than two dozen energy suppliers have gone bust since the start of September, putting thousands of people out of work and leaving millions of homes in limbo as they wait for a new supplier.

The cost of all the failures will be passed on to households up and down the country, putting further pressure on already rising bills.

Many in the energy industry blame part of the problems on the energy price cap. The cap is currently set every six months, and as gas prices have skyrocketed in recent months it has forced suppliers to provide energy to households at eye-watering losses.

So regulator Ofgem has proposed a series of short and long-term solutions to the issues the price cap causes in extreme circumstances.

The short-term fixes would come into force between April and the end of September while the long-term solutions will start in October. Here the options being proposed:

Long-term solution one – the circuit breaker

This proposal would keep the price cap the same as it is today. But during a major shock it would give officials the option to step in and change prices at short notice.

This option could be left to Ofgem’s discretion, or be based on a pre-decided point – such as gas prices hitting a certain level.

Long-term solution two – three-month price caps

The price cap is currently changed every six months, and the price is based on wholesale energy costs from two months before the cap is changed.

This means that in March energy suppliers will be selling gas and electricity based on wholesale prices from the last summer.

This option would reduce that time-lag by getting Ofgem to review the price cap every three months, rather than every six.

This would mean that rises, and falls, in energy prices are passed on to households quicker and would better insulate suppliers against global markets.

Long-term solution three – price cap contracts

This is perhaps the most radical long-term solution.

It would mean that price cap customers sign up to a six-month contract with their energy supplier.

If a customer wants to leave the contract before it is over they will have to pay an exit fee.

Ofgem will update the prices every month, and new customers would sign up to that month’s price cap for the entirety of their contract.

Short-term fix one – offer cheaper deals to all customers

If a supplier starts offering new, cheaper, tariffs to attract new customers, it must also offer the same deal to its existing customers.

At the moment the cheapest deal on the market is the price cap tariff, so it is attracting lots of new customers.

But suppliers are worried that in April when the price cap is hiked by hundreds of pounds, rivals might lure households away with cheaper, and unsustainable, offers.

This short-term fix would ensure that an energy supplier cannot use its existing customers who are paying higher prices to subsidise its attempts to attract new customers.

This option would be good for many energy suppliers, help reduce unsustainable pricing, and benefit customers who do not switch suppliers a lot.

Short-term fix two – price cap exit fees

This option would stem the flow of customers moving from price cap tariffs to new tariffs that undercut the market – as explained above – by charging customers if they want to leave their current price cap tariff.

These kinds of fees are already common for customers who are on fixed-term deals.

Any exit fees must be proportionate, Ofgem said.

When a supplier takes on a price cap customer they will buy enough energy to supply that customer for months, if not a year, ahead.

It is fair that they should be able to recoup some of the costs of this energy should a customer leave, Ofgem said.

Short-term fix three – a poaching fee

Suppliers who take customers off one of their rivals might have to pay a fee to that rival to cover some of its losses.

This would only come into force if wholesale energy prices drop by more than 30% to 50% compared to the assumptions made this winter when officials calculate what the price cap will be between April to September next year.

Short-term fix four – Do nothing

Does what it says on the tin – or rather, it doesn’t.