Ofgem to consult on price cap methodology to reflect rising energy costs

The energy market regulator has set out plans for an “enhanced” approach to monitoring, compliance and enforcement of licence conditions

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UK energy market regulator has announced its intention to consult on the price cap methodology to ensure it reflects the rising energy costs, risks and uncertainties energy suppliers face.

In an open letter to energy suppliers, Ofgem said it recognises that these are challenging circumstances and that energy suppliers have to deal with difficult decisions, including commercial ones.

Ofgem said it will examine how the current design and operation of the price cap might evolve recognising that the future of the price cap is a question for the government.

The regulator also explained there will be an “enhanced approach to monitoring, compliance and enforcement of licence conditions”.

That will aim to ensure that energy firms retain a sustainable business model while minimising risks to customers and the energy market in general.

More specifically, Ofgem plans to conduct more regular assessments of supplier finances, including audits and apply increased scrutiny to make sure that suppliers are on a reliable financial footing with appropriate management strategies in place.

The letter also unveils the regulator’s ambition to take “a more robust” approach to assessing suppliers’ operational capacity, pricing and hedging practices as they reach the 50,000 and 200,000 domestic customers thresholds.

When suppliers do not meet Ofgem’s assessment criteria they will be subject to independent audits and further compliance and enforcement action.

The regulator also said it expects energy firms to “regularly demonstrate compliance with the requirement that individual with significant managerial responsibility or influence in the business are fit and proper to occupy their role”.

In assessing compliance, Ofgem will consider the capacity of individuals to manage market risks and uncertainties and will take into account whether they have held positions of responsibility or influence in companies that have exited, leaving behind significant costs, and in particular, instances of mismanagement which failed to protect the interests of energy consumers.

The letter also unveils the regulator’s intention to pause assessment of applications for new supply licences, by extending the reasonable period of assessment, initially to a period of six months.

Ofgem Chief Executive Jonathan Brearley said: “These are challenging times, requiring bold action.

“We welcome continued constructive and collaborative engagement with our stakeholders to ensure we can, together, achieve the shared goal of protecting consumer interests on the road to a net zero energy system.”

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