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How could a dynamic Ofgem energy price cap work, and who could lose out?

Here's what we know about energy regulator Ofgem's latest proposals.

File photo dated 03/02/22 of an online energy bill. Ofgem is to consider a new
A dynamic energy price cap could potentially bring prices down for everyone. (Alamy/PA)

Ofgem is considering a new dynamic price cap, which could vary depending on the time of day households use their energy.

The energy regulator said introducing "time-of-use dependent" unit rates could provide more flexibility to the market and potentially bring prices down for everyone. It also says that as the energy market evolves, and with the country gradually moving towards net zero, a new system is needed to reflect these changes.

The plan is still in the early stages, with Ofgem inviting people to share their views and concerns by 6 May, but we already have some idea of how such a system could work.

Campaigners have said that whatever Ofgem decides to do, they must ensure that the most poor and vulnerable households in the UK do not inadvertently shoulder the costs of moving towards net zero via a new tariff system.

What is dynamic pricing and how does it work?

Dynamic pricing is when prices are adjusted in real time to reflect market conditions. For example, energy prices could be higher at times of peak demand, for example, in the early evening when most people have got home from work.

More households are adopting "time-of-use" tariffs, which charge customers different amounts for their energy usage at different times, according to Ofgem, which said that for this reason, it could be harder to retain the current universal price cap.

Supporters of dynamic pricing claim it could encourage the use of renewable energy sources. For example, with the UK building more green energy infrastructure, consumers could benefit from cheaper energy when it is windy or sunny.

Ofgem said energy retail markets were changing as increasing numbers of consumers changed their energy consumption and begin using electric vehicles, heat pumps and solar panels.

Ofgem’s director general of retail and markets Tim Jarvis said: “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 to ensure the market works for everyone.”

Ofgem said that by encouraging people to shift the time of their energy consumption, which takes pressure of the national grid during peak times, it will "in turn reduce costs for everyone".

While we still don't know exactly what this new system will look like, a spokesperson for the regulator told Yahoo News that "more flexibility" in the market will encourage "more competition".

Currently, the price cap is in place to protect consumers from volatile wholesale market shocks, but most energy providers have been charging as much as possible under this system.

Ofgem said it has also protected consumers against the so-called "loyalty penalty", where customers on default tariffs paid higher prices.

As it appeals for members of the public to share their views before 6 May, Ofgem suggests other possible ways to make the market less rigid, such as a targeted cap to help more vulnerable people, a limit between suppliers' default tariff and tariffs available in the market, or a cap on the margin suppliers are able to make.

Uswitch.com director of regulation Richard Neudegg said: “Almost three years on from the start of the energy crisis, we’re yet to see a full return to competition in the market – and the price cap must bear some of the blame.

“The devil will be in the detail, but it is vital that any changes made to the cap creates conditions to bring back better deals for consumers, and also offers targeted protections to the most vulnerable.”

What are the concerns?

Ofgem, having introduced the energy price cap in January 2019, provided a detailed breakdown on its website about changes to costs and where the money is going.

Maintaining this transparency under any new system is crucial, said Matt Copeland, head of policy and public affairs group for fuel poverty charity National Energy Action.

"It gives everyone that confidence that these things are being done properly... it's also really useful for charities and campaign groups in this sector, it gives us quite a lot of information than we had previously," he told Yahoo News.

Copeland said that before the price cap, prices would change fairly regularly, and when they inevitably went up, energy providers would point the finger at "policy costs" (blaming the government) with little evidence to back it up.

He also said that having all of this information available gives households a better insight into how energy consumption to works, which in turn helps the transition towards net zero.

In order to maintain this sense of transparency, he suggested Ofgem could publish some kind of price reference, indicating what it thinks a "fair" price is.

Copeland also raised concerns that vulnerable and low-income households could end up bearing the brunt of the costs of moving towards net zero. He warned that many people in these demographics may be more inflexible with their energy consumption times and could end up facing higher prices as a result.

"Some unintended consequences from this could quite significantly lump lots of costs onto vulnerable customers. Ofgem will have to be extremely careful," he said.

Simon Francis, of charity End Fuel Poverty Coalition, told the Telegraph: "People shouldn’t be penalised and dis-incentivised from putting the heating on when they need to. Smart meter systems need to actually be smart and work for this to actually happen.”

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