Blog Post

Energy Price Cap rises to record high but it’s far below what is needed

Richard Simmonds • Oct 01, 2021

Changes to the energy price cap come into force today but it is far below what is needed for energy suppliers to ride out the current crisis.

Price cap rise

The price cap has increased to its highest level since it was first introduced in 2019. The cap limits how much an energy supplier can charge their customers but with wholesale energy prices continuing to climb it is preventing companies from raising energy bills prices to match.

Customers on standard tariffs, with typical household levels of energy use, will see an increase of £139 - from £1,138 to £1,277 a year - to their bill. People with prepayment meters, with average energy use, will see an annual increase of £153 - from £1,156 to £1,309 and households with larger than average energy use will have a higher annual bill.

Despite the increase market analysts say that the new price cap increase is less than half the rise in energy costs that suppliers are having to deal with, resulting in many companies making a loss and as we’ve seen in the past few days and weeks be forced to exit the market.

Also read: Wholesale Energy Prices, Bad Debt and the Price Cap are proving detrimental to Energy Suppliers

A detriment to energy suppliers

Many in the energy supply industry have complained that the energy price cap is making the current crisis worse.

With suppliers unable to cover their costs due to the restrictions imposed by the cap they are unable to make up the difference being caused by the surging wholesale price of gas.

Larger suppliers too have long criticised the cap claiming that they are being forced to shoulder billions of pounds in extra costs by providing customers with energy that is costing more to buy than they are allowed to sell.

The pressue on supplier finances is likely to increase too as consumer groups warn that rising energy bills will send an extra 500,000 people into fuel poverty this winter.

Energy suppliers are already struggling with the large amount of bad debt that has amassed during the Covid-19 pandemic and Ofgem’s ruling that they were unable to chase non bill payers has only exacerbated the situation.

“It costs around £600 to take on a new customer at the moment because of the astonishing price of gas in the market and that’s the main issue. More energy suppliers are expected to fail given the volatility in the gas market,” said Emma Pinchbeck, chief executive of Energy UK in an interview with the BBC.

Also read: What has caused the Energy Market Crisis and what does it mean for the energy retail market?

Large Suppliers aren’t safe

During the current crisis much of the attention has been focused on small energy suppliers due to them being more vulnerable to the sharp gas price rises and weaker financial positions, however, speculation is growing that even the larger suppliers are at significant risk.

Ofgem has put the management consulting company Teneo on standby to potentially act as a special administrator in the event a large energy company should fail. An event that could prove too much for the regulator’s Supplier of Last Resort system.

“Ofgem and government prepare for a wide range of scenarios and have longstanding contingency plans in place for any situation as needed. These processes include speaking to a range of organisations,” said an Ofgem spokesman.

It isn’t clear which of the big suppliers is at risk but signs are pointing to Bulb as being a possible candidate after it declared it was in talks to secure new funding sources after it reported making losses and made a deal to defer paying off millions of pounds of debt.

Needless to say, if a supplier of that size is forced out of the market the impacts will send shockwaves throughout the industry.

Also read: Bulb Energy makes deal to delay repaying £55 million of Loans as rising wholesale prices bite