OFGEM price cap choices

The OFGEM price cap is due to be announced at the end of August 2022. It does not cap bills but rather sets the standing charge and unit cost for variable rate utility customers.

OFGEM is part of government and therefore its actions preusmly are aligned with government intention. OFGEM identify as,

There are an infinite number of possibilities regarding the price cap announcement. Many of which are irrelevant to our interest. If you’re reading this for predictions as to the future price cap such a matter is outside of our interest other than imaging the consequences of the different choices. Therefore, we consider a few extremes for horizon scanning and tenth person concerns into the decision process.

Option 1 - End the price cap

End the price cap. Allow the industry to set prices to whatever this wish rather than defaulting to the government price cap maximum. This is unlikely as the existence of the price cap is to protect people from the market and Covid has shown government can act. Such action would allow government to try and sell a narrative of nothing to do with us!

Option 2 - What energy crisis?

Set the price cap in line with pre determined methodology. This is the equation which has been utilised effectively to create the dire warning of the likely inflation driving price shock that is expected. This is likely to see an enlargement of currently announced government interventions but even with government retrospective support it drives inflation.

Option 3 - Manipulate the price cap

Manipulate the price cap to drive stake holders deliberately and forcefully. This is intrinsically a matter of picking winners and losers and aligning consumer and distributor actions to government policy. This is potential a more potent tool that interest rate rises.

Option 3A - Tiered pricing

Here we are imagining tiered pricing as being different pricing based on the amount of units used. Not variable pricing that smart meters would allow.

A system could be imagined where a certain number of units are provided free of charge to all members of society and then additional units are purchased through current purchasing methods. Such a method rewards efficiency savings while allowing the consumer to be free to consume additional units if they wish.

Option 3B - Standing charge jack up

Within the price cap set tariffs the standing charge component could be significantly increased to provide the majority of the additional liquidity required for suppliers to buy energy with units costs remaining low. Such a method would protect high unit users from colossal bills and distribute the cost amongst all users. A standing charge of the sort is unlikely to surive in the long term and would possible end up incoperate in general taxation.

However, if government support met this increase in standing charge then this would allow the government to intervene, by funnelling money through the consumer to the company, and maintain liquidity within the wider sector. Mainting the government charges within the standing charge would result in the intervention cosing less than it would appear.

Option 3C - All about the units

Rather than increasing the standing charge the full cost of the increase in generation and supply could be linked to the unit cost. Simplicity of implementation is the primary benefit this. Linkage to market signals is perhaps also a benefit of this approach. However, such a price approach is likely to require significant intervention by government to create retrospective affordability and is likely to offer nothing more than these benefits. More creative thinking could offer better outcomes than this at similar cost and perhaps without stoking inflation.

Option 3D - Drive behaviours

It would be possible for the regulator to drive consumer behaviours by reflecting the future trajectory of the British energy sector at this point. This would entail allowing the unit charge for gas to increase dramatically prompting consumer switch over to electricity for both heat and cooking. Such an intervention would require the government to support consumers in the change over and clear direction as to the intention of travel. This approach would also require government intervention to lower the electrical unit cost artificially to what is anticipated to be post-gas generation rather than what it currently is.

Incentivising those who can afford to transition from gas, while supporting those who cannot is perhaps the most sensible mid term approach. However, action of this sought is perhaps unlikely as it would further expose the lack of decarbonisation urgency in the electrical generation sector over the summer and such a shift could have been signalled in the summer to allow for preperation.

Option 3E - Nationalised energy

The regulator could choose to set the price cap at such a level that it fundamentally undermines the business model of the supply companies. As such companies leave the market their customers could be transferred to a nationalised energy provider. Such an action within resultant profits and loss would then be born by the exchequer. The present UK government is perhaps ideologically apposed to such action.

A final insight that may be gained with the Ofgem price cap will be the nature of the government response to it. Perhaps there will be clear integration with the decisions made within the price cap and the corresponding government intervention. If such synchronicity is not apparent then the parameters of future consultancy may require significant enlargement.

OFGEM. 2022. Check if the energy price cap affects you. [online] Available at: [Accessed 22 August 2022].URL.

TPEX offers future imagining and tenth person consultancy for decision makers looking to consider the future, before opportunities are missed. We offer online and in-person consultancy to help your business make informed decisions about the future.

• Start Now
• Learn More
• Insights
• Remarks