A consultation on how to develop a more dynamic energy price cap has been launched by the regulator, Ofgem.

The regulator claims the current price cap system has worked well to protect customers from higher ‘default’ prices and the worst of the recent volatile markets and wholesale price surges.

But it claims energy retail markets are changing as increasing numbers of consumers change their energy consumption and begin using electric vehicles, heat pumps, and solar panels. 

As this customer diversity grows, and more households adopt time-of-use tariffs, it could become harder to retain a universal price cap that is suitable for everyone, claims Ofgem.

So it is considering how the price cap, and energy regulation as a whole needs to adjust to ensure customers are protected, they continue to pay a fair price for their energy, and they get to realise all the benefits of net zero.  

To inform that work, it has published a discussion paper on the future of price protection. It complements a Government Call for Evidence (CFE) on default tariffs published last month.

The introduction of half hourly settlement from 2025 means customers will have more flexibility in how they use and pay for electricity, and is expected to lead to a growth in smarter time of use tariffs that reward customers for being more flexible in their energy usage. This will allow consumers to have cheaper energy when renewable generation increases such as when it is particularly windy or sunny.  

Ofgem is suggesting a range of options including introducing a more dynamic cap with time-of-use rates to encourage consumer flexibility, and even a targeted cap which could be based on a variety of factors such as consumer vulnerability.

A further option is introducing more flexible, market based price protections such as setting a limit between a supplier’s default tariff and tariffs available in the market, capping the margin suppliers are able to make, or replacing the cap with a ban on acquisition only tariffs.

Tim Jarvis, Ofgem’s director general, says: “While the price cap played an important role in protecting consumers from the loyalty penalty that existed before its introduction, the energy market is changing as we move to net zero, and we recognise the systems we have in place may need to change too.  

“We’re looking in detail at the elements of the price cap that have worked well and the challenges we’ve identified in recent years, while also considering how a wide range of future consumers will use and pay for energy, to make sure we develop the right measures that will protect and benefit consumers across the board.  

“We will continue to work with government, industry, consumer groups, charities and the public on the future of pricing regulation. Our aim is ensure the market works for everyone.”