The energy regulator Ofgem has proposed an overhaul to the price cap, which could see it reviewed every three months instead of every six.
The price cap determines energy costs for those households on variable tariffs – which is currently around 22 million homes.
Ofgem said the shake-up is designed to allow customers to get falling energy prices more quickly than the current system does, as well as price rises.
This comes as energy bills are expected to increase significantly once more when the next price cap level comes into force in October. Annual payments already reached £1,971 for a typical household paying by direct debit and £2,017 for those with prepayment meters when the last price cap level was introduced in April.
Money Saving Expert's Martin Lewis today strongly criticised Ofgem's proposal, saying he was 'very concerned' that the changes would 'sell consumers down the river.'
The price cap was introduced in 2019. It’s a limit on the maximum amount energy companies can charge for each unit of gas and electricity a household uses, as well as the maximum daily standing charge, which is what you pay to have your home connected to the grid.
A common misconception is that the cap is an upper limit on what you pay for your energy. But this is incorrect – the cap actually concerns the rates of your bill (or how much you pay per unit of energy used) rather than your bill itself, so if you use more energy than other households, you'll pay more than them.
The price cap applies to the standard, variable and default tariffs offered by suppliers. If you're on a fixed-term energy deal it doesn't apply to you directly. But suppliers are likely to raise the prices on their fixed tariffs as well, which means you'll probably find yourself paying more for your gas and electricity when your contract ends and you look to lock in a new fixed deal.
At the moment, any new fixed tariffs on the market are all considerably higher than the already-high capped variable tariffs.
The cap is currently set every six months (in April and October) by the government and calculated by Ofgem. The regulator calculates three typical domestic consumption values (TDCVs) for 'low', 'medium' and 'high' users based on the amounts of gas and electricity someone uses. For instance, a 'medium' user utilises 12,000kWh gas and 2,900kWh electricity per year.
Ofgem’s proposed update would mean the energy price cap is changed four times a year instead of twice a year.
The regulator said this would mean customers’ energy bills would rise or fall more quickly, depending on wholesale prices. It said a more frequent price cap would reflect the most up to date and accurate energy prices. In practice, it's likely to mean that bills increase more frequently in the short term, as wholesale prices are not expected to drop in the coming months.
Ofgem’s consultation follows criticism that the present twice-yearly adjustment arrangement contributed to the dozens of energy providers that have stopped trading.
The consultation is open until 14 June. If the proposed change goes ahead it won't be implemented until January next year, when households would see the first three-monthly price cap change.
Analysts suggest energy bills could rise to almost £2,600 in October for a typical household paying by direct debit when the next price cap adjustment is due.
Jonathan Brearley, CEO of Ofgem, said: ‘Our top priority is to protect consumers by ensuring a fair and resilient energy market that works for everyone. Our retail reforms will ensure that consumers are paying a fair price for their energy while ensuring resilience across the sector.
‘The last year has shown that we need to make changes to the price cap so that suppliers are better able to manage risks in these unprecedented market conditions.’