Energy suppliers could have to hand money back to customers in Ofgem price cap review
Ofgem could order suppliers to pass money back to customers this winter, as part of its latest review of wholesale energy costs in relation to the price cap.
The energy watchdog has written to all retail suppliers in an open letter, confirming it will now consider whether allowances for suppliers have fairly reflected the costs of buying gas between October 2022 to September 2023.
Gas prices have eased over the course of the year, but wholesale costs still remain well above conventional trading levels, with the price cap still double pre-crisis norms.
Dan Norton, deputy director of price protection for Ofgem, wrote that the regulator is “keeping the price cap formula under review to ensure that customers continue to pay a fair price that reflects the underlying efficient cost to supply the energy” and that it “does not over-reward suppliers where a fall in prices may lead to benefits.”
He added that the review will also be “examining areas where suppliers were allowed to recover costs from last year to understand whether a similar ‘benefit’ has been created in current market conditions which should be recovered for customers”.
Allowances are factored into the price cap level to help suppliers cover the cost of supplying energy to consumers, with the aim of supporting market stability.
Previously, these allowances have been raised to recognise rising wholesale market prices caused by exceptional events such as the Covid-19 pandemic and the Russian invasion of Ukraine.
However, as conditions in the retail market have stabilised, Ofgem is now looking at whether allowances led to a benefit or cost for suppliers as prices fell in 2023.
The deadline for suppliers to respond is 14 August.
If an adjustment necessary, Ofgem will aim to reform allowances for the January 2024 price cap to ensure any previous gains are recovered and passed back to customers this winter.
This follows chief executive Jonathan Brearley’s open letter to suppliers earlier this month, where he confirmed the watchdog would be keeping costs and allowances under constant review to ensure customers continue to pay a fair price for their energy.