Energy Price Cap Could Rise to Cover Coronavirus Defaults

The energy regulator could allow suppliers to hike bills as they absorb high levels of customer debt due to the coronavirus pandemic. 

Energy companies have been warning for months that they could face a crushing burden of bad debts as finically-strapped customers default on bills. 

Citizens Advice has found that one in nine consumers—or the six million Brits—have already fallen behind on bills, including for energy. Several energy suppliers have reported a sharp rise in customers cancelling direct debits, an early indication that households are struggling to afford payments.

Energy suppliers have reached an agreement with the regulator and government to ensure households remain connected to supply during the crisis, even if they fall behind on bills.

Ofgem has now put forward plans to account for this consumer debt when calculating the level of the energy price cap, which limits bills for the 11 million households on default tariffs.

The regulator adjusts the level of the price cap every six months, in April and October, to account for fluctuating energy company costs. The cap is due to fall to its lowest level yet, £1,042 a year for a dual-fuel household with typical use, from 1 October, reflecting a collapse in wholesale gas and electricity prices this spring, as the coronavirus lockdown suppressed demand.

Even as it trimmed the cap last month, Ofgem warned that it could rise again from April to account for a recovery in energy market prices.

With a wave of redundancies and business failures anticipated this winter, following the closure of the furlough scheme on 31 October, Ofgem is also anticipating many consumers will struggle to pay their bills and thinks the cap should account for this.

“We set the level of the cap to reflect the cost to suppliers of supplying this energy. However, the Covid-19 pandemic has potentially changed these costs in a way that wouldn’t be accounted for in the existing cap methodology,” the regulator said.

Raising the price cap would mean that households which can afford to pay their energy bills would shoulder the bills of those that can't—something Ofgem says already happens.

“Suppliers recover the costs of people not paying their bills from people that are paying their bills. In that sense the costs are always socialised across customers that did not cause the problem,” the regulator said.

“In addition, customers may have cancelled direct debits and transferred to standard credit. We therefore propose to recover any adjustment for debt-related costs from all default credit customers.”

Ofgem has opened a consultation, seeking industry responses about changing the cap’s methodology.

The energy price cap is already higher than many fixed-rate tariffs. Whether they’re struggling with their bills or not, consumers are urged to seek out better deals.